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Rekenthaler Report

Index Funds: Presumed Guilty

But probably innocent.


The Allegations
In his 2015 shareholder letter published last month, hedge fund chief Bill Ackman suggests that U.S. stock index funds may be creating two forms of instability. One is relative price disparity, between those stocks that are being rewarded with index-fund inflows and those that are not. The second is absolute price inflation, whereby index fund flows have created (or are creating--Ackman waffles on the timing) a market bubble.

(In addition to those items, Ackman attacks index funds for threatening the eventual health of the economy by being too easy on corporate chieftains. Unlike active investment managers, who are willing to hold laggards' feet to the fire, index funds tend to support entrenched corporate managers even if their results are poor, which will lead to complacency and weakness from corporate America. It's an intriguing notion, but outside the scope of this column.)

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.