Elon Musk and Cathie Wood argued in a tweetstorm that the increased popularity of passive index funds has become a “major problem” as the bosses of those funds gain outsized power over the boards of public companies.
“Decisions are being made on behalf of actual shareholders that are contrary to their interests! Major problem with index/passive funds,” the Tesla chief wrote in a tweet Wednesday.
“In my view, history will deem the accelerated shift toward passive funds during the last 20 years as a massive misallocation of capital,” CEO of ARK Invest Cathie Wood added.
The two heavyweights chimed in after famed venture capital Marc Andreessen noted top financial figures like BlackRock chief Larry Fink have an outsized say in American corporations when it comes to pushing agenda like ESG. But Wood also noted passive investors miss out on some high-growth stocks.
The main holding of Wood’s flagship ETF, ARKK, is Tesla — the electric car company makes up nearly 10% of fund. Wood, whose still bullish on Tesla, argued passive investors missed out on Tesla’s meteoric rise.
“Passive funds prevented many investors from enjoying a 400-fold appreciation in $TSLA from a $1.6 billion market cap at its IPO in June 2010 to ~$650 billion when it entered the S&P 500 ten years later in December 2020,” Wood tweeted.
Wood is one of the most notable active investors — but in recent years she has had mixed results. In 2020, she made a more than 150% return. But in 2021 she ended the year down more than 20%. And this year she’s down nearly 50% year to date.
The conversation comes as passive investment funds take up an increasing percentage of market share – roughly 60% of all equity assets are in passive products like ETFs. Passive investments have much smaller fees than hedge funds and other investment vehicles — and have outperformed many active funds in recent years.
Still, the man who started the first major index fund – Vanguard founder Jack Bogle – raised the alarm that even as index funds can help average investors, giant institutions can gain outsized control.
In a Wall Street Journal opinion editorial published just months before his death, Bogle wrote “If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation.”