Index Funds Need to Be Passive, Not Political

The rise of index funds has provided millions of Americans with a cheaper and more efficient way to invest. With more than $23 trillion in assets between them, BlackRock Inc., Vanguard Group Inc. and State Street Corp. have become the top shareholders in many US-listed companies.

That power has attracted critics ranging from Senator Bernie Sanders to the late Charlie Munger. Increasingly, the companies’ stakes in banks and energy utilities have gotten so big that they’ve triggered regulatory concerns. Policymakers now must tread a fine line: protect the immense value created by index funds while ensuring these companies aren’t abusing their power.

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Regulators can impose onerous rules on any investor deemed to have significant influence or control over a utility or a bank. To avoid such oversight, funds have long received blanket authorizations from the Federal Energy Regulatory Commission and made passivity commitments to the Federal Reserve.

In recent years, however, suspicions have emerged that the “Big Three” firms might be meddling too much in the companies they own.

Criticism escalated after BlackRock Chief Executive Officer Larry Fink started advocating for more corporate involvement in fights over climate change, human rights and more. Republicans attacked the “woke” agenda, with some states blackballing BlackRock and others. Whatever one’s position on such issues, it became harder to see the companies’ “investment stewardship” teams as purely passive.