22-05-2025
Index Funds Are a Bit More Illegal
Ten years ago last month, I first wrote about a then-novel theory that index funds are illegal. The theory is:
When we first discussed this theory, I called it 'wonderful' but also 'mad.' It is clever, in that it draws logical conclusions from standard theories of (1) investment diversification and (2) corporate fiduciary duties to shareholders. But it had sort of a jokey flavor. In 2015, few people believed this theory that index-fund managers were telling companies to keep prices high. For one thing, they weren't. The big index-fund managers don't go have meetings with their portfolio companies to say 'hey you should stop competing and raise prices so we make more money.' They don't do that because it would be illegal, and because each of them only owns a minority stake in each company and can't tell managers what to do, and because they tend not to get too involved in the operational details of their portfolio companies. They own every company in the index, without making any specific investment decisions, so there is no reason for them to think about any company's pricing strategy.
