ETFs: the road to serfdom?

Cheap trackers, exchange-traded funds and passive investing have been accused of undermining capitalism. Matthew Partridge exmines why.

Are you a budding revolutionary, looking to undermine capitalism from within? Then buy cheap trackers and exchange-traded funds, and wait for the rapid growth of passive investing to do the rest. That's according to a new paper called The Silent Road to Serfdom: Why Passive Investing is Worse than Marxism by Inigo Fraser-Jenkins and analysts at US research firm Sanford C Bernstein.

In essence, the report defends the social contribution of active managers. The point of capital markets is to allocate resources efficiently. Good companies should attract investment, while bad ones fail. Fraser-Jenkins argues that active managers, poring over fundamentals to find undervalued businesses and sell overvalued ones, are key to this process. Passive investing, by contrast, is backward-looking money chases money, with no regard to quality. In a 100% passive market, notes Bloomberg's Matt Levine, "the biggest company... today will remain the biggest... tomorrow, and capital will never be allocated from bad uses to good ones". That, says Fraser-Jenkins, is worse than Marxism central-planning may be inefficient, but at least it's a conscious process. Passive investing merely leads to momentum-driven short-termism.

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Dr Matthew Partridge
Shares editor, MoneyWeek

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri