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Elon Musk and Cathie Wood knock passive index investing, saying it’s gone too far

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Cathie Wood, chief govt officer and chief funding officer, Ark Invest, gestures as she speaks through the Bitcoin 2022 Conference at Miami Beach Convention Center on April 7, 2022 in Miami, Florida.

Marco Bello | Getty Images

Elon Musk and Cathie Wood took intention at index funds in a Twitter thread, arguing that passive investments have managed too huge a share of the inventory market.

The CEO of Tesla responded to a publish by enterprise capitalist Marc Andreessen, who stated large asset managers like BlackRock have outsized voting energy in company America due to their more and more standard index funds. Musk agreed with Andreessen, saying passive investing “has gone too far.”

“Decisions are being made on behalf of actual shareholders that are contrary to their interests! Major problem with index/passive funds,” Musk tweeted.

Ark Invest’s Wood joined the dialog Wednesday, saying traders in index funds just like the S&P 500 ETF missed out on Tesla’s 400-fold appreciation earlier than it was added to the fairness benchmark.

“In my view, history will deem the accelerated shift toward passive funds during the last 20 years as a massive misallocation of capital,” Wood added.

Wood has turn into one of the high-profile lively managers on Wall Street. Her flagship ARK Innovation ETF, with Tesla as its greatest holding, has suffered a brutal yr thus far amid rising charges, dropping almost 45%.

Passive investments reminiscent of index funds and exchange-traded funds have taken up about 60% of the fairness belongings, stealing market share from lively rivals, in line with JPMorgan estimates. Money has flooded into passive merchandise as traders have been attracted by their decrease administration charges throughout booming bull markets. The marketplace for index funds has reached $6 trillion, whereas the marketplace for ETFs has ballooned to $5 trillion because the SPDR S&P 500′s inception in 1993.

Over the previous few a long time, index investing has additionally carried out a lot better as most lively traders trailed their benchmarks. In the 12 months by March, simply 19% of large-cap lively managers outperformed, in line with knowledge compiled by Savita Subramanian, head of U.S. fairness and quantitative technique at BofA Securities.

Jack Bogle, the founding father of Vanguard who devised the index fund in 1975 as a means for retail traders to have the ability to compete with the professionals, warned of the rising energy of the large passive fund managers and their management over the voting shares of America’s largest firms.

Bogle warned of “major issues” within the coming period in a 2018 Wall Street Journal op-ed just some months earlier than he handed away.

“If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation,” Bogle wrote. “Public policy cannot ignore this growing dominance, and consider its impact on the financial markets, corporate governance, and regulation.”

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