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Are Large Passive Funds Discouraging Competition?

The data do not support a causal story.

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Over the past few years, a group of economists and law professors has made a provocative argument: Large index funds discourage competition among the companies they own, hurting consumers. If this is true, this "common ownership" problem suggests policymakers should engage in a hugely disruptive response, by either curbing the size of asset managers that invest in competing companies or limiting their ability to diversify within the same industry. Recently, these ideas have jumped from the academic to the policy realm. In fact, the Federal Trade Commission recently held a daylong hearing and requested public comment on proposed remedies to this problem.

Could Mutual Funds' Common Ownership Hurt Competition?
But first, let's take a step back: What is common ownership, and what are the effects that academics and policymakers are worried about? Common ownership refers to the phenomenon of asset managers acquiring large stakes of several companies within the same industry (for example, a passive fund that tracks the S&P 500 will necessarily buy shares in  American (AAL),  Delta (DAL),  Southwest (LUV), and  United (UAL)).

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

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