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Matt Levine

The Big Shareholders Get Bigger

Also bZx, FCoin and

One simple story you could tell about passive investing is that it is pretty purely a game of efficiency: Every S&P 500 fund, for instance, provides the same gross-of-fees return, so the way to compete is by having slightly lower fees than everyone else. And the way to do that is probably economies of scale: It doesn’t cost all that much more to run a $100 billion index fund than it does to run a $100 million index fund, so the big fund can charge less (as a percentage of assets) than the little fund, so people who sensibly choose index funds based on price will tend to buy the biggest ones. So the biggest index-fund managers will get bigger, the small ones will get smaller, and the index-fund market will be dominated by a few big players.

Meanwhile the rise of passive investing puts a lot of pressure on active managers, and that pressure tends to manifest itself in mergers: