Index Funds Pose a Big Risk
Index funds have proven to be good for investors. They offer the diversification benefits of a broad portfolio, but greatly lower overall costs. However, there is an area where they are proving a risk-corporate governance. Most big companies have one of three major fund houses (BlackRock, State Street, or Vanguard) as their largest shareholder. But such funds do not want to spend the money to improve corporate governance at individual companies, as investors in the funds are not willing to pay the extra fees to do so. Therefore, many of the largest shareholders in the nation are simply abstaining from being involved.
FINSUM : Not only is the lack of involvement an issue, but the structure of index funds themselves reward companies who may have behaved poorly merely because they are part of an index. Altogether, neither side of the equation has an incentive to improve corporate governance, a dangerous situation.
- index funds
- corporate governance
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