The more American corporations grow and the American government and its budget expand, the more conspiracy theories emerge that a handful of the most powerful people and influential groups run the economy and the country as a whole. come. While it is easy to dismiss these concerns as crazy theories, there is no doubt that some degree of crony capitalism and government corruption exists.
One of the most common accusations circulating on social media in recent years is that three powerful investment firms, BlackRock Inc. (ticker: BLK), Vanguard, and State Street Corporation (STT), have made shockingly large sums of money. It owns the US stock market. The idea that three corporate entities own a large portion of Wall Street is understandably troubling to many Americans. But while there may be legitimate concerns about the power and influence of his managers in these three big funds, they actually don’t own as much of the market as they seem.
What does a fund manager do?
If you have a personal brokerage account, 401(k), individual retirement account (IRA), or other investment account, there’s a good chance that a large portion of your money is invested in index mutual funds or exchange-traded funds (ETFs). Become. ). These investment funds are collections of stock holdings designed to harness the power of diversification and reflect the returns of popular stock market indexes such as the S&P 500 Index or the Nasdaq 100 Index.
The weightings and components of these stock market indexes change regularly, and fund managers are responsible for adjusting their holdings in ETFs and mutual funds accordingly by buying and selling stocks.
Funds can be managed actively or passively. Active fund managers typically try to outperform the overall stock market by implementing some proprietary trading strategy. Passive fund managers do not seek to outperform the market; they simply aim to replicate market performance. Passive investment funds typically charge lower fees than active funds.
Unfortunately, the majority of active stock funds consistently underperform the S&P 500, and this phenomenon is driving more and more investors to passive funds.
The kings of passive investing are, you guessed it, Vanguard, BlackRock, and State Street. Chances are, most retirement accounts are filled with funds managed by these three asset management companies.
A 2019 study by Harvard Business Review found that Vanguard, BlackRock, or State Street are the largest publicly traded owners of 88% of S&P 500 companies. For example, the largest S&P 500 company by market capitalization is Microsoft Corporation (MSFT), valued at over $3 trillion. A quick look at Microsoft’s largest institutional holders reveals some not-so-surprising results. Microsoft’s top three investors are Vanguard with 8.9%, followed by BlackRock with 7.3% and State Street with 4%.
A quick check of top investors in Apple Inc. (AAPL), Nvidia Corp. (NVDA), Alphabet Inc. (GOOG, GOOGL), or any other multi-trillion dollar US stock will yield similar results. Sho. But the key to understanding the difference between legitimate concerns about the influence of the Big Three fund managers and the conspiratorial sides criticizing them lies in the use of the word ‘ownership’.
As asset managers, Vanguard, BlackRock and State Street buy shares on behalf of the fund’s investors, not themselves. BlackRock may have bought all of Microsoft’s shares, but the company doesn’t actually own most of them. It simply manages them.
This subtle but important difference is highlighted by the large difference between BlackRock’s assets under management (AUM) and its market capitalization. As of the first quarter of 2024, BlackRock’s assets under management (the total market value of the investments it manages) were a mind-boggling $10.5 trillion. At the same time, BlackRock itself is a public company with shares traded on the New York Stock Exchange. BlackRock’s market capitalization, or the total value of all its shares, is about $118 billion. That’s certainly a big number, but it’s nowhere near the $10.5 trillion in investor-owned stock that the company controls but doesn’t own.
Fund managers make money from the management fees they charge investors who buy and hold mutual funds and ETFs in their investment or retirement accounts. Even if Microsoft’s stock price rises, BlackRock won’t directly benefit from the profits because it doesn’t actually own most of the Microsoft stock it controls.
What are the popular BlackRock, State Street, and Vanguard funds?
The Big Three fund managers may not “own” a large portion of the American economy, but they certainly “control” a large portion of the passive fund market. As of February 2024, ETF.com estimates that Vanguard funds account for 30.1% of the total stock ETF market, with BlackRock accounting for an additional 29.4%. State Street is a distant third with a 14.8% share. In other words, the big three funds collectively account for 74.3% of the total stock ETF market.
For Vanguard, its largest ETFs include the Vanguard S&P 500 ETF (VOO), which tracks the S&P 500, and the Vanguard Total Stock Market ETF (VTI), which tracks the entire U.S. stock market. The VOO Fund has $444 billion in assets under management and the VTI Fund has $390 billion in assets under management.
BlackRock owns the popular iShares ETF family. The firm’s largest ETFs include the iShares Core S&P 500 ETF (IVV), which tracks the S&P 500, and the iShares Core MSCI EAFE ETF (IEFA), which tracks the global MSCI EAFE Investable Market Index. . The IVV Fund has $455 billion in assets under management and the IEFA Fund has $117 billion in assets under management.
When it comes to State Street, investors will recognize popular SPDR ETFs, including the S&P 500 Sector SPDR ETF. State Street’s largest ETF is SPDR S&P 500 ETF Trust (SPY). With total assets under management of $515 billion, the SPY ETF is currently the largest ETF in the U.S. market by assets. Technology Select Sector SPDR Fund (XLK) is the most popular SPDR sector ETF with $64 billion in AUM.
Efforts to curb fund manager control
Just because BlackRock, Vanguard and State Street don’t actually own a majority of the fund’s assets doesn’t automatically eliminate concerns about market influence.
The Big Three fund managers may not own investors’ shares, but they vote on their behalf on corporate governance issues. As a result, fund managers have drawn criticism from both the far right and far left of politics. Progressive Sen. Bernie Sanders called the concentration of assets held by the Big Three “sneaky.”
Conservative entrepreneur and politician Vivek Ramaswamy has been an outspoken critic of the Big Three’s influence on American social issues. Ramaswamy and others say BlackRock, Vanguard and State Street are voting to advance certain environmental, social and governance (ESG) issues that the majority of investors do not support. These issues include topics such as climate change, human rights, and workplace diversity.
Concerns about the influence of the big three fund managers have led to several bills in Congress that would require funds to transfer voting rights to individual investors. Vanguard, BlackRock, and State Street have also launched pilot programs that give investors the option to vote for themselves, but so far participation in these programs has been low.
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Fund managers BlackRock, Vanguard and State Street don’t technically own a majority stake in the U.S. stock market. But their funds dominate the passive ETF and mutual fund market, giving the three companies potentially worrying voting rights and control over how U.S. companies are run. The concentration of assets in the three largest fund managers has drawn criticism from progressives who worry that the companies could grow too large to fail and create systemic risk to the U.S. financial system. Conservative critics also point out that most U.S. investors disagree with many of the ESG initiatives these companies are pushing.
