A robust literature describes the incentives and stewardship practices of the “Big Three” asset managers (BlackRock, Vanguard, and State Street Global Advisors), often referring to these asset managers as “passive.” This is so common that the “Big Three,” “index fund,” and “passive manager” are used almost interchangeably by both academics and practitioners. This shorthand emerged in the foundational scholarship in this area, and while it may remain useful in certain contexts, its casual use obscures important features of the market and contributes to misperceptions. In this chapter, we demonstrate that it is a mistake to equate passive investing with index funds; index funds with the Big Three; and the Big Three with giant asset managers. We further sketch some of the consequences of these distinctions and set forth questions for further research.

A stylized fact that lurks in the background of the recent literature on common ownership is the parallel increase in the profitability of oligopolistic industries and common ownership. Some have argued that the growth in common ownership has caused the increase in oligopoly profits and have proposed a variety of policy responses. This paper briefly reviews the available evidence and finds it unconvincing. It then provides an overview of the evidence that concentration and profitability have increased, considers alternative explanations, and suggests that the emergence of “superstar” firms – and not the growth in common ownership – could be a fundamental driver of the parallel increase in concentration and profitability.

Regulators and commentators around the world are increasingly demanding that institutional investors engage in stewardship with respect to their portfolio companies. Further, the demand for stewardship has broadened from an expectation that investors engage to reduce agency costs and promote economic value to a call for investors to demand that companies serve a broader range of societal interests and objectives. This chapter considers calls for stewardship in the context of the U.S. capital markets specifically as applied to index funds. It argues that, irrespective of the merits of institutional stewardship generally, the structure of index funds and the business environment in which they operate limit their ability to engage in effective stewardship. Although index fund sponsors have had a powerful influence on their portfolio companies, well-intentioned calls for them to play a more significant role and, in particular, claims that they should incorporate non-economic objectives more broadly into their engagement strategy, are in tension with the valuable role that index funds serve in the U.S. markets by providing a low-cost diversified investment option for an increasing segment of ordinary citizens. The chapter concludes by considering the possibility of using pass-through voting to enhance the stewardship potential of index funds.