Last Thursday, State Street Corp announced that its flagship S&P 500 ETF (SPY) reached half a trillion dollars, propelled by the S&P 500’s record highs and a steady inflow of investor funds.
Launched in 1993, SPY celebrates its 31st year of operation this year, continually reinforcing its position as the main vehicle for investors to participate in the prosperity of the US.
Recently, SPY’s assets under management (AUM) slightly declined from the $500 billion mark as the index experienced a pullback. However, SPY is not the sole ETF tracking the S&P 500; three others also provide this service. IVV and VOO, managed by BlackRock and Vanguard respectively, are close competitors, boasting AUMs of $444 billion and $413 billion.
Over time, the considerable influence of these major index ETFs on the stock market has raised concerns among some investors.
To illustrate, VettaFi reports that 633 ETFs hold shares in Apple (AAPL), and another 700 have positions in Microsoft (MSFT).
For Apple, the top two institutional shareholders are Vanguard Group and Blackrock, with a combined ownership of 15.29%. Adding State Street Corp’s 3.8% stake, the three largest ETF providers control 19.09% of Apple—nearly a fifth.
Similarly, for Microsoft, these top three ETF managers collectively hold a 20.21% stake.
This trend towards index investing has concentrated ownership of major companies in the hands of these institutions.
David Einhorn, the hedge fund manager of Greenlight Capital, recently remarked:
“All of a sudden, the successful investors are those holding overvalued assets that benefit from the influx into indexes. This shifts capital from value stocks to indexes, selling undervalued assets to buy the most overpriced ones at an exaggerated scale,”
In essence, Einhorn criticizes index ETFs for perpetuating the greater fool theory—a cycle where buying begets more buying, regardless of valuation, pushing overvalued stocks higher, which in turn elevates the index, attracting even more investment under the belief of perpetual long-term gains.
Indeed, the S&P 500 ETF has been among the most lucrative investments, yielding nearly 10% annually over the past 31 years, unmatched by other index ETFs. Despite its premium compared to indices from other countries, the S&P 500 has continued to grow more overvalued.
Proponents argue that this success reflects the superiority of US enterprises—innovative, well-managed, and profitable. However, I believe it extends beyond that, a market that is driven by fund flows. The US holds a significant share of global investor funds, which these funds have a preference towards US investments. Moreover, the practice of some aspects of Modern Monetary Theory has created immense market liquidity that has further buoyed US markets over the years.
It’s challenging to resist participating in this trend, as opting out could mean risking underperformance or missing out on gains. The question remains: will this trend continue? One can only hope so.
