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Rekenthaler Report

There’s No Need to Regulate Index Funds

Nipping a bad idea in the bud.

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Business Squabbles
Traditional investment managers have disliked index funds ever since they were introduced. Understandably so. Index funds not only drastically undercut the industry’s pricing, thereby threatening its profitability, but they also implicitly denigrate active management. After all, index funds only thrive if most active managers cannot beat their benchmarks, after costs.

Indexing’s attack has led to 40 years of sniping from active managers. Buying an index fund, they state, means settling for mediocrity. Or, all index funds are losers, since after expenses they trail their benchmarks. Indexing creates stock-market bubbles, because index funds invest mindlessly, without regard for valuations. Indexing distorts security prices, inflating the prices of stocks held by the major indexes, while depressing those of the outsiders.

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