Regulators Ask If Index Funds Are Bad

Yesterday I went to a Federal Trade Commission hearing about “concerns that acquisitions and holdings of non-controlling ownership interests in competing companies, for example by institutional investors, may have anticompetitive effects.” And both on Twitter and in person during breaks at the hearing, people would come up to me and ask “so are index funds illegal yet or what?” So I feel like my schtick is working.

You know all this stuff, right? There are worries that common ownership of multiple companies in the same industry by big institutional investors will lessen competition among those companies. That worry, in its modern form, comes from a paper by José Azar, Martin Schmalz and Isabel Tecu, which claims to find that common ownership of U.S. airlines by big investors has led to increased prices and reduced competition. Other empirical and theoretical papers about other industries have followed. I have been writing about it since 2015, and I’ve enjoyed phrasing the question maximally as “should index funds be illegal?” That is a little bit of a joke, but not really, because if you take this stuff seriously enough then it does seem like large diversified shareholders—index funds but also other mutual funds—would pose a problem under the antitrust laws, and you’d have to do something about them.