The larger American corporations grow and the more the U.S. government and its budget expands, the more conspiracy theories arise that a handful of the most powerful people and influential entities are running the economy and the country as a whole. It’s easy to dismiss these concerns as crackpot theories, but there’s no question there is a certain amount of crony capitalism and government corruption out there.
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One of the most common accusations circulating on social media in recent years is that three powerful investment firms, BlackRock Inc. (ticker: BLK), Vanguard and State Street Corp. (STT), own a staggeringly high amount of the U.S. stock market. The idea that three corporate entities own the majority of Wall Street is understandably troubling for many Americans. But while there may be some legitimate concerns about the power and influence of these big three fund managers, the truth is they don’t actually own as much of the market as it may seem.
What Do Fund Managers Do?
If you have a personal brokerage account, a 401(k), an individual retirement account (IRA) or any other investment account, there’s a good chance a large portion of your money is invested in index mutual funds or exchange-traded funds (ETFs). These investment funds are collections of stock holdings designed to leverage the power of diversification and mirror the returns of popular equity market indexes, such as the S&P 500 or the Nasdaq-100 index.
Because the weightings and constituents of these equity market indexes change periodically, fund managers are responsible for making corresponding adjustments to the holdings of their ETFs and mutual funds by buying and selling shares of stock.
Funds can either be actively or passively managed. Active fund managers typically attempt to outperform the overall stock market by implementing some form of unique trading strategy. Passive fund managers aren’t trying to outperform the market and are instead aiming simply to replicate its performance. Passive investing funds typically charge lower fees than active funds.
Unfortunately, the majority of active equity funds have consistently underperformed the S&P 500, a phenomenon which has driven more and more investors to passive funds.
The kings of passive investing are — you guessed it — Vanguard, BlackRock and State Street. More than likely, most retirement accounts are filled with funds managed by these three asset managers.
A 2019 study by Harvard Business Review found either Vanguard, BlackRock or State Street is the largest listed owner of 88% of S&P 500 companies. For example, the largest S&P 500 company by market capitalization is Microsoft Corp. (MSFT), with a more than $3 trillion valuation. A quick glance at Microsoft’s largest institutional investors reveals some not-so-surprising results. Microsoft’s top three largest investors are Vanguard, with an 8.9% stake, followed by BlackRock, at 7.3%, and State Street, at 4%.
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A quick check of the top investors in Apple Inc. (AAPL), Nvidia Corp. (NVDA), Alphabet Inc. (GOOG, GOOGL) or any other trillion-dollar U.S. stock would yield similar results. However, the key to understanding the difference between legitimate concerns about the influence of the big three fund managers and the conspiratorial aspect of their critics lies with the use of the word “ownership.”
As asset managers, Vanguard, BlackRock and State Street buy stocks on behalf of their funds’ investors, not themselves. BlackRock may be the one buying all the Microsoft stock, but the company doesn’t actually own most of those shares. It simply manages them.
This subtle but important difference is highlighted in the wide disparity between BlackRock’s assets under management (AUM) and its market capitalization. As of the first quarter of 2024, BlackRock’s AUM, the total market value of the investments it manages, was a mind-boggling $10.5 trillion. At the same time, BlackRock is a public company itself with stock that trades on the New York Stock Exchange. BlackRock’s market cap, or the total dollar amount of all the company’s stock, is about $118 billion. While that’s certainly a large number, it’s nowhere close to the $10.5 trillion in investor-owned stock that it manages but does not own.
Fund managers profit from the management fees they charge investors who buy and hold their mutual funds and ETFs in their investing and retirement accounts. When Microsoft’s stock price goes up, BlackRock doesn’t benefit directly from those gains because BlackRock doesn’t actually own most of the Microsoft stock it manages.
What Are BlackRock, State Street and Vanguard’s Popular Funds?
The big three fund managers may not “own” the majority of the American economy, but they certainly “control” the vast majority of the passive fund market. As of February 2024, ETF.com estimates Vanguard funds represent 30.1% of the total equity ETF market while BlackRock accounts for another 29.4%. State Street is a distant third, with a 14.8% share. In other words, the big three’s funds account for a combined 74.3% of the entire equity ETF market.
For Vanguard, the company’s largest ETFs include its Vanguard S&P 500 ETF (VOO), which tracks the S&P 500, and its Vanguard Total Stock Market ETF (VTI), which tracks the entire U.S. equity market. The VOO fund has an AUM of $444 billion, and the VTI fund has an AUM of $390 billion.
BlackRock owns the popular iShares ETF family. Its largest ETFs include its iShares Core S&P 500 ETF (IVV), which tracks the S&P 500, and its iShares Core MSCI EAFE ETF (IEFA), which tracks the global MSCI EAFE Investable Market Index. The IVV fund has an AUM of $455 billion and the IEFA fund has an AUM of $117 billion.
As for State Street, investors will likely recognize its popular SPDR ETFs, including its S&P 500 sector SPDR ETFs. State Street’s largest ETF is the SPDR S&P 500 ETF Trust (SPY). With an AUM of $515 billion, the SPY ETF is currently the largest ETF in the U.S. market by assets. The Technology Select Sector SPDR Fund (XLK) is the most popular SPDR sector ETF with an AUM of $64 billion.
Efforts to Curb Fund Manager Control
Just because BlackRock, Vanguard and State Street don’t actually own the majority of the assets in their funds doesn’t mean concerns over their market influence should automatically be dismissed.
The big three fund managers may not own their investors’ stocks, but they do vote on behalf of their investors on corporate governance issues. As a result, the fund managers have drawn criticism from both the right and left ends of the political spectrum. Progressive Senator Bernie Sanders has called the concentration of assets held by the big three “obscene.”
Conservative entrepreneur and politician Vivek Ramaswamy has been an outspoken critic of the influence the big three have on U.S. social issues. Ramaswamy and others say BlackRock, Vanguard and State Street are voting to advance a specific environmental, social and governance (ESG) agenda that a large portion of their investors do not support. These issues include topics such as climate change, human rights and workplace diversity.
Concerns over the influence of the big three fund managers have prompted multiple congressional bills aimed at requiring funds to pass their voting rights on to individual investors. Vanguard, BlackRock and State Street have all also launched pilot programs to give investors the choice of voting on their own, but participation in those programs has been low up to this point.
Takeaway
Fund managers BlackRock, Vanguard and State Street do not technically own a majority share of the U.S. stock market. Their funds dominate the passive ETF and mutual fund markets, however, giving the three companies a potentially concerning amount of voting power and control over how U.S. companies operate. The asset concentration among the big three fund managers has drawn criticism from progressives concerned about these companies becoming too big to fail and creating systemic risks for the U.S. financial system. Conservative critics have also pointed out that a large portion of American investors don’t agree with many of the ESG initiatives that these companies are pushing.
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These 3 Fund Families Control 74% of the Market originally appeared on usnews.com
