Technology giant Nvidia opened its doors in 1993, and publicly floated its shares in 1999. Did you purchase on IPO day, or in 2020? Perhaps early 2023?
Readers know the answer to these questions. That Nvidia can presently claim a market cap of nearly $2.2 trillion is all the evidence we need that most didn’t see in 1993, 1999 and realistically much of 2023 what they see now. If Nvidia’s future had been remotely obvious, competitors would have put it out of business early on, or purchased it. No one leaves trillions lying around.
Surely stating the obvious, Nvidia’s staggering market cap is a certain sign that most investors, regardless of their professional or retail orientation, didn’t see a commercial future that is always and everywhere opaque. Which is a long way of saying that when people tell you they know what will be the next Nvidia, they’re lying. Billionaires are rare for a reason.
Which brings us to Index funds. Some retail investors no doubt buy them because they believe markets are mostly or a lot efficient such that they just want broad market exposure. Others want roughly the same whereby they attain through Index funds all the publicly held knowledge about the future for the best and brightest U.S. companies of the present. Still others feel stung by Nvidia, along with TeslaTSLA, AppleAAPL and Alphabet before it: since there’s no realistic way of knowing what the next Nvidia will be, just attain broad, cap-weighted Index exposure so that when the next hot company or companies reveals itself, investors can go along for the ride and see their exposure to tomorrow’s Nvidias expand in concert with the expansion of the market caps of the future giants.
For the reasons mentioned above, and surely others, more and more investors are passively putting their wealth to work in Index funds. The challenge now is that critics and entities like the Federal Energy Regulatory Commission (FERC) are publicly expressing fear that these passive investment funds will use their rapidly expanding retail investor market share to influence the doings of corporations in political fashion. FERC in particular fears Index funds leaning on public utilities with ESG notions top of mind.
Thankfully, the fears are overdone, oversold, or insert your adjective. Index funds don’t exist to influence corporate activity, nor do investors in those funds pay for it. Put another way, the surest sign that critics of Index funds needn’t fear their politicizing corporate decisions can be found in the low – and falling – fees that investors pay for ownership in the funds. They’re paying for market exposure, and that’s what’s being provided to them.
Secondly, and in consideration of large mutual fund companies like T. Rowe Price, State Street and Vanguard, their Index funds quite simply are not designed to influence corporate activity. With Vanguard for instance, it has controls in place described as “passive practices” to ensure that its sizable stewardship of investor funds isn’t used as a proverbial big stick whereby certain corporate activity (or lack thereof) will instigate the buying or selling of shares. Index funds exist once again to provide investors with low-cost exposure to the market, not active, high-cost influencing of the market.
Lastly, mutual funds like Vanguard are truly mutual. Owners of shares in its Index funds also own the funds. Incentives are aligned with its Index funds, period. The aim is market exposure. Nothing else.
So, while presumably every mutual fund company can claim funds catering to every investor taste, including ESG, there’s no there there to the expressed worries about Index funds. Not only is political influence decidedly not their intent, the funds would have few buyers and wouldn’t be passive funds if the aim were anything but market exposure. In short, efforts to get the government involved in Index-fund oversight is excessive, and meritless.
