Inigo Fraser Jenkins as soon as warned that passive investing was worse for society than Marxism. Now he says even that provocative framing could show too beneficiant.
In his newest notice, the AllianceBernstein strategist argues that the trillions of {dollars} pouring into index funds aren’t simply monitoring markets — they’re distorting them. Massive Tech’s dominance, he says, has been amplified by passive flows that reward dimension over substance. Traders are funding incumbents by default, steering extra capital to the most important names just because they already dominate benchmarks.
He calls it a “dystopian symbiosis”: a suggestions loop between index funds and platform giants like Apple Inc., Microsoft Corp. and Nvidia Corp. that concentrates energy, stifles competitors, and provides the phantasm of security. Not like earlier market cycles pushed by fundamentals or lively conviction, in the present day’s flows are automated, usually detached to danger.
Fraser Jenkins is hardly alone in sounding the alarm. However his newest critique has reignited a debate that’s grown more durable to disregard. Simply 10 corporations now account for greater than a 3rd of the S&P 500’s worth, with tech names driving an outsize share of 2025’s beneficial properties.
“Platform corporations and an absence of lively capital allocation each indicate a much less efficient type of capitalism with diminished competitors,” he wrote in a Friday notice. “A concentrated market and excessive proportion of flows into cap weighted ‘passive’ indices results in higher dangers ought to latest developments reverse.”
Whereas the emergence of behemoth corporations may be reflective of more practical makes use of of know-how, it may be the results of failures of anti-trust insurance policies, amongst different issues, he argues. Synthetic intelligence would possibly intensify these points and will result in even higher concentrations of energy amongst corporations.
His notice, titled “The Dystopian Symbiosis: Passive Investing and Platform Capitalism,” is formatted as a fictional dialog between three individuals who debate the subject. One of many characters goes so far as to argue that the current state of affairs requires an lively coverage intervention — drawing comparisons to the breakup of Normal Oil at the beginning of the twentieth century — to revive competitors.
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In a provocative notice titled “The Silent Street to Serfdom: Why Passive Investing is Worse Than Marxism” and written practically a decade in the past, Fraser Jenkins argued that the rise of index-tracking investing would result in higher inventory correlations, which might impede “the environment friendly allocation of capital.” His employer, AllianceBernstein, has continued to launch ETFs because the well-known analysis was printed, although its launches have been actively managed.
Different lively managers have offered related viewpoints — managers at Apollo International Administration final yr stated the hidden prices of the passive-investing juggernaut included larger volatility and decrease liquidity.
There have been robust rebuttals to the critique: a Goldman Sachs Group Inc. examine confirmed the position of fundamentals stays an omnipotent driver for inventory valuations; Citigroup Inc. discovered that lively managers themselves exert a far greater affect than their passive rivals on a inventory’s efficiency relative to its trade.
“ETFs don’t smash capitalism, they exemplify it,” stated Eric Balchunas, Bloomberg Intelligence’s senior ETF analyst. “The competitors and innovation are by way of the roof. That’s capitalism in its best type and the winner in that’s the investor.”
Since Fraser Jenkins’s “Marxism” notice, the passive juggernaut has solely grown. Index-tracking ETFs, which have grown in reputation due to their ease of buying and selling and comparatively cheaper administration charges, are sometimes cited as one of many main culprits on this debate. The phase has raked in $842 billion to date this yr, in contrast with the $438 billion hauled in by actively managed funds, whilst there are extra lively merchandise than there are passive ones, information compiled by Bloomberg present. Of the greater than $13 trillion that’s in ETFs total, $11.8 trillion is parked in passive automobiles. Nearly all of ETF possession is concentrated in low-cost index funds which have considerably lowered the price for traders to entry monetary markets.
In Fraser Jenkins’s new notice, certainly one of his fictitious characters ask one other what the “dystopian symbiosis” implies for traders.
“The passive index is riskier than it has been prior to now,” the character solutions. “The size of the flows which have been disproportionately into passive cap-weighted funds with a excessive publicity to the mega cap corporations implies the chance of a major detrimental wealth impact if there’s an upset to expectations for these massive corporations.”
