Over the past decade ETF's have seen a huge rise in popularity. This could be due to any number of factors, the largest I believe are availability and ease of use. A passive investor can simply buy into a diversified ETF and sit back. If they are feeling sophisticated they can buy ETF's that target certain sectors, then continue to sit back. Offering diversified ETF's and mutual funds has been a popular strategy for employers looking to furnish tax advantaged accounts to employees.
However, I am beginning to see a problem with this model. The loss of market democracy. When I own shares of SDY or QCILIX I don't get to partake in the voting for the underlying securities. Instead SPDR and TIAA take care of that. As people buy into these funds, the fund goes out and buys more shares and continues to grow its voting rights in those perspective companies. As this continues companies such as Blackrock, Vanguard, TIAA, etc hold almost all the say in how companies are governed. They choose who is appointed to the board, which accounting firm is used, and more.
Is this a good thing? I don't think so. I think when a small number of investment firms can dictate how a huge number of public companies are run, we can end up in trouble. Are we getting the best board members? Are we getting to vote for greener manufacturing processes?
However at this point, can we convince the larger investing community to directly invest? It is possible to build a diversified portfolio of individual stocks, you just have to work at it. But it's harder than that, for instance I simply don't have options though TIAA to choose funds outside of theirs. I also have ETF's which are doing really well in my taxed account and I would be sad to see them go. But the reality is, I don't need the middle man taking an E/R every year and we don't need them having all the voting rights. I think from here on I will probably try to stick to buying direct securities as often as possible.
The saying was #DrainTheBanks, perhaps we should have #DrainTheETF's