Navigating the Blackrock/Vanguard "Final Boss" Scenario
Over the past decade, Blackrock and Vanguard have rapidly emerged as the enormously powerful "final bosses" at the climax of the investing universe. Together, they have amassed a mind-boggling $17 trillion+ in assets under management (AUM) – greater than the annual GDP of the U.S. economy itself.
Through providing low-cost access to market returns, these indexing giants have lured millions of investors to park their money in what many consider the "default" option. In the process, Blackrock and Vanguard have amassed shareholder votes that give them unrivaled influence over the largest publicly traded companies globally.
Their meteoric rise has invited comparisons to the monopolistic power wielded by final bosses in video game lore – enormous forces to be reckoned with at the climax of the campaign. Defeating them requires tremendous skill, resources, and often a bit of luck.
So how did these twin titans develop such terrifying power? And what fate awaits challengers daring to confront them? This guide offers perspective into the ultimate "boss battle" taking shape.
The Passive Indexing Playbook
Blackrock and Vanguard‘s core strategy centers around passive indexing – offering funds tracking market performance rather than trying to beat it. This approach minimizes stock-picking and trading costs, allowing them to scale assets by keeping fees ultra low.
Consider active stock picking approaches as risky side quests in search of elevated loot drops. Passive funds instead focus on finishing the main storyline quickly through embracing beta (market returns). And they can grind enemies rapidly with huge grouping potential.
For instance, an active mid-cap growth mutual fund may charge 1%+ annually versus just 0.03% for Blackrock or Vanguard‘s S&P 500 offerings. Compounded over years, lower fees alone can lead to a staggering spread in ending wealth.
Additionally, benchmark tracking allows unlimited party sizes. Billions flow into popular indexed funds like Vanguard Total Stock Market (VTSAX) or Blackrock’s iShares Core S&P 500 ETF (IVV). The resulting scale crushes costs even further.
Few active managers can compete on price long-term. And chasing slightly elevated returns has led most to severely lag benchmarks net of fees.
Ownership Statistics – The Scope of Their Power
After a decade of prolific asset gathering, Blackrock and Vanguard now wield shocking influence – the combined shareholder voting power of an entire raid boss guild:
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They are the largest shareholders in 40% of all listed public companies in the U.S.
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Among S&P 500 companies, they hold top 3 stakes in nearly 90%
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Average ownership across S&P 500 firms = over 20% of shares outstanding
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Across Russell 3000 index, average combined ownership = 22.2%
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Global ETF assets overall exceed $10 trillion after surging at a 25% CAGR since 2013
In essence, nearly half of Corporate America answers to the top executives at these two passive power brokers in some form. Their shareholder votes can have enormous influence on corporate policies and governance.
Trillions in equity assets also provide enviable stable income streams. Blackrock netted over $20 billion in fees during 2022 – more recurring revenue than juggernauts like Netflix ($31b market cap) or Nike ($221b market cap).
This extreme concentration of power has sparked concerns about systemic risk. Regulators now face intense "boss fights" in balancing efficiency with competition.
The ESG Controversy Raging On
Beyond ownership stakes, Blackrock and Vanguard have waded into public ESG controversies recently that could shape economic landscapes for decades.
Much of this traces back to Blackrock CEO Larry Fink – one of the highest profile advocates for environmental and socially focused corporate governance. His annual letter to CEOs pushes what some consider an "ultra progressive" agenda:
- Transitioning global energy infrastructure towards renewables
- Embedding DEI and equality metrics into exec compensation
- Overhauling supply chains for sustainability
- And large-scale emissions reductions
To skeptical observers, this social activism looks like virtue signaling and "greenwashing" – marketing gimmicks to attract millennial investors.
Fink also notably warned that Blackrock would start voting against boards failing to make progress on environmental and social issues. This kind of public threat rightfully angers those who prefer free markets to centrally planned initiatives.
However, recent shareholder voting trends muddle this picture of asset management kingpins forcing ESG onto corporations:
- Blackrock supported just 42% of environmental proposals over past 3 years
- Vanguard backed 18% of social responsibility proposals in 2022
- Broker analysis found 95% of ESG measures backed by Blackrock still failed anyway
Do these figures indicate a weakened resolve or lack of real influence altogether? As with any controversial initiatives, the reality likely lies somewhere in between.
Measuring ESG support involves tricky classifications around what defines these proposals in the first place. Mixed signals continue feeding speculation around what drives these indexing giants on key ethical questions facing markets.
But there is no debating their industry resources offer enviable mind share opportunities compared to everyday investors. Just the visible platform from controlling trillions in equity assets can apply pressure.
Evaluating Regulatory Counterattacks
Nonetheless, the roster of concerned politicians and regulators questioning Blackrock/Vanguard‘s impact on competition continues expanding. What outcomes seem plausible from new rules or enforcement actions?
Break Up Attempts – Structural limits around passive funds greatly complicate any extreme measures like breaking up companies. Since assets are invested on behalf of clients, regulators would struggle proving harm worthy of such disruption.
However, Blackrock and Vanguard clearly meet conventional monopoly thresholds in certain markets using standard concentration metrics:
- 72% combined share of ETF assets
- 60% combined share of indexed mutual fund assets
Still – even prior enforcement actions against Big Tech giants focused solely on specific business divisions related to antitrust injuries. No reasonable case exists for dismantling Blackrock/Vanguard‘s entire indexing ecosystem spanning millions clients.
More likely next steps involve clarifying appropriate boundaries on conflicts of interest around proxy voting and investee engagement policies. The sheer breadth of their portfolios intensifies risks of self-dealing.
Ownership Limit Proposals – Some suggest capping ownership stakes specifically in competing companies within concentrated industries. This raises tricky questions around limiting investor rights though.
Groups like the SEC would also need to define complex aspects such as:
- Thresholds for "competing" status between portfolio companies
- Carveouts for passive funds tracking external benchmarks
- Guidelines around investor exemptions to ownership caps
Far more complexity lurks underneath the surface before advancing binding restrictions. And legal hurdles remain high for the foreseeable future.
Player Perspectives in a Consolidating Market
For everyday investors, the rise of these twin passive titans forces tough questions around portfolio influence. Despite owning a slice of an Apple or Microsoft, individual votes practically pale versus the steerage from trillion-dollar fund sponsors.
Increased index adoption no doubt boosted participation and lowered costs for smaller players. Yet the ultimate tradeoffs around choice and diversity are becoming impossible to ignore.
Market fragmentation appears doomed following continued expansion of what some consider "lazy portfolios" – simple, low-cost indexed asset allocations. But consolidation risks run deeper for armchair activists prioritizing certain values or governance changes.
To enact any field adjustments, shareholders must still contend with the game‘s most overwhelming adversaries at the end boss level. Player lobbying through public comments and regulatory engagement offers perhaps the most practical path for balancing efficiency with competition.
Forecasting the Final Act
In many ways, indexing pioneers like Blackrock and Vanguard have benefited from the complacency of challengers unwilling to grind for higher returns or lower costs. The ultimate effects of passive fund dominance remain in motion though.
Despite what some consider modest action to date, watchdogs grow increasingly wary of systemic risks tied to trillion-dollar asset consolidators. And public tensions around social activism or perceived greenwashing seem unlikely to fade soon.
As with any competitive landscape, balancing efficiency and innovation requires proactive measures before total monopoly becomes self-reinforcing. Passive funds largely escaped market power scrutiny thus far as bigger fish occupied regulators.
But as indexing goliaths cement their status as financial world "final bosses," their expanding authority commands reassessing what oversight levers to influence behavior and structure may become necessary.
For the observing public, most lack resources to meaningfully impact these giant‘s trajectory anytime soon. Like iconic gaming bosses, chipping away at their advantages requires exceptional skill, strategy, and grind. Small players can support allies with regulatory capabilities and constructive criticism.
Ultimately, the concentrations now seen in index fund sponsors may necessitate action on multiple fronts to distribute influence. Otherwise, Blackrock, Vanguard and other conquering titans may accumulate irreversible market power for generations to come.