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Tuesday, January 10, 2017

In Defense of Index Funds

News summary by MFWire's editors

Leave it to the co-founder of the world's largest ETF shop to come to the defense of index funds.

Barbara Novick
Vice Chairman
In an op-ed published in the Sunday edition of the Journal, Barbara Novick tackles recent criticism from some academics that "index investing discourages competition among the companies in which the funds invest." These papers, which have not yet passed peer review, have spawned a second wave of criticism that index funds don't comply with antitrust regulations.

The papers' authors suggest that the anti-competitive nature of index funds could be improved by preventing managers of index funds from voting on behalf of shareholders and restricting the funds' assets to one company per sector.

Novick takes as much issue with these criticisms as she does with the presented solutions. She notes that the first solution is "puzzling," given the flack that index funds have received for lax ownership responsibilities, and slams the second as opposing "the fundamental premise ... [of] modern portfolio theory."

She defends index funds as vehicles that have provided everyday investors with increased access to diversified portfolios. Though she admits there's room for operational improvements, Novick is weary of criticisms that lack concrete support and solutions that come at the expense of the average investor.  

Edited by: Katy Golvala

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