Earlier this week, I introduced the idea that the rise of indexing and ETFs, known collectively as passive investing, is damaging the market and the economy, and I started spinning out the worst-case scenario should it continue to advance, including a riskier stock market and widening income inequality. But there are other areas to be concerned about as well.
Competition is what academics worry about when they worry about passive investing. Traditionally, preserving competition was mostly about maintaining a certain number of companies in every industry. Federal antitrust laws block monopolies. But academic studies have shown recently that index funds or horizontal ownership, where the same investors own a good percentage of the shares in rival companies, can also stifle competition. Horizontal ownership has risen sharply in the past decade and a half. For a large company, the chance that at least one of its large shareholders owns shares in a rival has risen to 90%, up from just 16% in 2000. And the more horizontal ownership there is, it appears, the less competitive a company, and an industry, becomes. In 2014, two economic consultants, Jose Azar and Isabel Tacu, and Michigan economics professor Martin Schmaltz, found that in the airline industry, where common ownership had risen to 70%, prices were as much as 12% higher because of common shareholders.
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