The engagement work they do undertake is partly meant to counter criticism from stakeholders that they are too passive. My response is that the Big Three or no single institution can fully research the 4000 plus stocks that the Big Three hold. And the Big Three hold positions in these smaller indexes as well. Even if the stock were to get kicked out of the S&P 500, it migrates down to the S&P 600 mid-cap and of course most likely stays on the Russell 3000 index. They often claim that they are “universal owners” and will hold the stock longer than virtually anyone else if the stock is in the index. Index investing is a genius innovation of our time as it democratizes access to tax-efficient and extremely cheap way for savers to diversify their bets and transfer wealth across their life cycle and across generations without incurring much time and effort to the research associated with betting on slivers of the public market.Ģ.0 With great power, comes great responsibilityĬollectively, the Big Three owns around 15-20% of every company in the S&P 500. And indeed, there is plenty to celebrate. It is tempting to stop here and celebrate the social value added by indexing. As a first cut, let’s simply go with 0.12% expense ratio as what it takes to run passive investments in the public market. I could not find financial statements for State Street Global Advisors (SSGA), which runs State Street’s index business, to figure out what SSGA charges by way of revenues for their index business. Vanguard states that its asset-weighted expense ratio is 0.09% on its website. So, share lending creates its own conflicts for the Big Three.Īlthough I am technically a shareholder at Vanguard, I, surprisingly, could not find an income statement for Vanguard. But, the weird thing is that vote by BlackRock for a long position is implicitly a vote against short position held by the party that has borrowed securities. On the surface, this sounds relatively innocuous.

Thus, BlackRock appears to lend out 8% of the equity securities under management ($355/4.4 trillion), assuming equities are lent out more often than bonds.

Blackrock states that it had $355 billion of securities lent out as of year end of 2022. Included in the revenue numbers is $599 million that BlackRock earned by lending out securities held. Here, BlackRock charges $12.3 billion to run $3.3 trillion of “active” assets and that works out to an expense ratio of around 0.37%. This assumes that BlackRock is not subsidizing its index business with fees earned from its active business. So, the simple “expense” ratio on passive approximates to $6.574 billion/$5.5 trillion or roughly 0.12%. On page 3 of their 10-K, BlackRock discloses that of the $8.6 trillion, $5.5 trillion, relates to ETFs and non-ETF indexes.

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