Criticisms of index-based investing could pose a material risk to the company's business
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The criticisms of index investing — that it could distort investment flows, undermine price discovery, and so on — are not new, and have so far done nothing to derail the growth of ETF managers whose products follow the approach. But one ETF titan has admitted that such remarks could be weighty enough to deal it a damaging blow.
“As a leader in the index investing and asset management industry, BlackRock has been the subject of third-party commentary citing concerns about the growth of index investing,” the company said in a new risk disclosure in its annual report filed with the US Securities and Exchange Commission (SEC), according to Reuters.
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The firm said that if the conclusions of such detractors were to gain traction or result in policy measures that would restrict asset managers, its “business operations, reputation or financial condition may be adversely affected.”
BlackRock, which is recognized globally as an ETF titan, manages US$1.8 trillion of assets in its iShares-brand ETFs. Along with other researchers, it has previously disputed and dismissed academic studies saying that index funds’ “common ownership” of several companies in one sector could reduce competition, and may therefore need to be regulated.
In its recent disclosure to the SEC, BlackRock focused on that argument, and also made reference to commentary on the potential of index investing “to distort investment flows, create stock price bubbles, or conversely, exacerbate a decline in market prices.”
“Similar to many other public companies we take a conservative approach in disclosing ‘risk factors’ to shareholders,” a spokesperson for the firm told Reuters. “The dialogue around this topic is still extremely preliminary.”
