The Dangers of Index Investing

This article reviews a number of articles that researched effects index investing might have on companies, the economy, and others. It found evidence that index investing can make it more difficult to manage companies, hurt consumers, and cause other secondary effects that weren’t anticipated by the investors and don’t receive much discussion.

Another group of scholars is concerned that index funds can also hurt consumers more directly. In a study of banking ownership and competition, which was published in January, two University of Michigan business-school professors and a management consultant demonstrated that banks whose shares are often packaged in index funds tend to offer higher fees and rates for such services as account maintenance and deposit certificates than banks whose stocks are rarely or never included in index funds. The reason, the authors surmise, is that ownership by index funds gives banks an incentive to behave more as if they have a common owner. The reduced sense of competition leads the banks to charge consumers more.