William McNabb on the Costs and Limits of Passive Investing

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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This week on our Masters in Business podcast, we speak with William McNabb, chief executive officer and chairman of Vanguard Group. Vanguard is a passive-investing pioneer, with about two-thirds of its $4 trillion under management in index funds. The fund, created by Jack Bogle, just celebrated its 40th anniversary.

We discuss the cost aspect of investment management, both in its passive and active forms. Economies of scale allow Vanguard and rivals such as BlackRock, State Street and other huge firms to spread those costs across a very large asset base. There is a limit to how much scale can lower prices, and while we are not there yet, we may be getting close.

McNabb also discussed corporate governance issues and ESG (environmental, sustainability and governance) investing as a relatively new focus at Vanguard. McNabb, like some of his peers, has expressed concern about the short-term focus of corporate management and just how much of a role Vanguard should play as an activist shareholder. 

You can hear the full interview, including our podcast extras, at iTunes, SoundCloud and Bloomberg. All of our earlier podcasts can be found iTunes, SoundCloud, and Bloomberg. This is McNabb’s second appearance on Masters in Business. You can hear our 2015 conversation here.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Barry Ritholtz at britholtz3@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net