Are Index Funds Too Soft on CEOs?
Let's look at the argument that indexers fail with corporate governance.
The Third Accusation
Friday's column absolved index funds completely from one alleged crime, and largely from another. They have not inflated the level of the overall stock market. Nor have index funds substantially distorted prices within the marketplace. Yes, index-fund inflows are invested unequally, such that those companies held by the S&P 500 have received massive proceeds that other firms have not. But the effects have been minor, because when index funds exit, trillions of actively managed dollars remain to fill the gap.
(Consider, for example, First Solar (FSLR), dropped from the S&P 500 in March, after the company lowered its 2017 profit forecast. The company's shares took a two-month beating but recovered when First Solar raised its estimates. The stock is now 50% higher than when Standard & Poor's announced it would be dropping the company from the S&P 500. Devastating, that news was not.)
John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.