If you have an investing account, be it a 401(k), individual retirement account or just a brokerage account, there's a pretty good chance you have some of your money in an index mutual fund or exchange-traded fund.
These investment products, which aim to replicate the performance of market indexes, have grown in popularity over the years thanks to their low costs and generally superior returns when compared with the work of active managers.
In the passive investing world, three asset managers reign supreme: Vanguard, BlackRock (which operates iShares ETFs) and State Street, which manages the SPDR line of index funds.
If you recognize these names, it could be because you've seen them in your company's 401(k) lineup. But depending on your algorithm, you may have seen them on social media as well.
Search any of these companies' names on X or Instagram and you're likely to find posts from individuals claiming the asset managers "own" or "control" a huge number of U.S. corporations.
Even outside of conspiracy circles, politicians including House Judiciary Chairman Jim Jordan have said these companies, which control huge shareholder voting power at prominent U.S. companies, wield that power to advance political initiatives.
In an example widely cited by critics, the asset managers successfully backed activist hedge fund Engine No. 1 in a battle to install new directors on ExxonMobil's board who might push the energy firm to reduce its carbon footprint.
Presidential hopeful Vivek Ramaswamy has repeatedly likened these firms to a "cartel," alleging they want to usher in ESG policies around issues like diversity and the environment at American companies at the expense of shareholders' best financial interests.
Here's what you need to know the next time Vanguard, BlackRock and State Street come up in your feed.
No, these companies don't 'own' major corporations
Many of the memes you'll see regarding this trio of companies will claim that they "own," "control," or "are top investors in" major American corporations such as Apple, Lockheed Martin and Pfizer.
If you look up the top institutional investors in these firms, you will find major asset managers close to the top of the list. Vanguard is the top shareholder of Apple stock. BlackRock is No. 2, and State Street is No. 4. State Street, Vanguard and BlackRock are the top shareholders in Lockheed, in that order. Pfizer's top shareholders: Vanguard, BlackRock and State Street.
"They do own a large portion of the publicly traded shares of those companies, so that's true," says Daniel Sotiroff, senior manager research analyst for Morningstar Research Services. "But then you need to take a step back and ask yourself why that is."
The reason: These companies manage enormously popular index funds that are filled with investor dollars. The Vanguard 500, which aims to track the performance of the S&P 500, has more than $350 billion in assets. State Street's equivalent ETF has more than $400 billion.
That money is being invested in S&P 500 companies, such as Apple, Lockheed Martin and, yes, Pfizer. But it doesn't belong to the asset managers. It belongs to you.
"These companies own these shares on behalf of their investors," says Sotiroff. "They don't own them for their own personal corporate reasons. They didn't just go out there with their own money and start buying up stakes in these companies."
Investors know this to be true. BlackRock is a publicly traded company; the funds it invests on behalf of its shareholders amounted to more than $9 trillion as of June 2023. Meanwhile, the total value of every share of the company's stock is $95 billion.
That's because BlackRock makes money by collecting fees from its investors, not by reaping profits from the companies it invests in. In short, BlackRock doesn't own a portion of many U.S. corporations. The people who own shares in BlackRock funds do.
No, asset managers don't vote as a 'cartel'
OK, even if these asset managers don't own the shares outright, they still hold them on your behalf. And that means they can use your money to impact corporate decision-making, because of proxy voting.
Shareholders of a particular stock who may not be able to attend the shareholder meeting are allowed to vote by proxy — casting a mail-in ballot for the issues that may come up for vote during the company's annual meeting. These may include electing new board members, approving corporate moves, such as mergers or acquisitions, or setting executive bonuses.
If you own an S&P 500 index fund, though, you own shares in roughly 500 companies. As a matter of convenience, instead of mailing you 500 proxy ballots, asset managers vote on your behalf, advancing what they generally believe to be the best financial interests of their shareholders.
Here's where the critics come in. Ramaswamy and others say that these asset managers use voting power to push ESG initiatives — those aimed at improving environmental, social and governance issues at these companies — that they claim are detrimental to these firms' bottom lines.
Whether that's actually the case is up for debate. ESG proponents argue that preparedness for climate change, for instance, shows that a company is managing risk. Critics chalk up ESG policies as "woke" distractions getting in the way of profitable enterprises.
The thing is, the asset managers are very transparent about their voting process and how they vote. Read through the vast literature asset managers publish on this topic, and you'll find that the majority of these votes are on mundane corporate issues. During the 2023 proxy year, Vanguard voted 93% of time in favor of management-led proposals to elect directors — all 24,679 of them.
BlackRock, for all of the handwringing around its ESG initiatives, reports that the vast majority of shareholder proposals on environmental issues and those affecting people either lacked economic merit or concerned issues that were already being sorted out by the companies in question. As a result, BlackRock says, the firm supported just 26 out of 399 — 7% — of such proposals.
And any claims that the so-called "Big Three" are acting as a cartel on ESG issues are spurious as well. First of all, they may not even have the clout to do it, points out Stash Graham, chief investment officer at Graham Capital Wealth Management in Washington, D.C. At a big firm, he says, "the Big Three might own 20% of shares, but 80% is shareholders out there that are not the Big Three."
What's more, the Big Three hardly vote in lockstep. In an analysis of Vanguard, BlackRock and State Street proxy voting in the two years ending in March 2023, a Morningstar report found the three asset managers disagreed on key votes more than two thirds of the time.
Still, you might be thinking, I don't like the idea of these big mutual fund companies voting on my behalf, especially on issues that could be seen as political. Firms are testing out programs to address these concerns.
Vanguard, BlackRock and State Street have all launched pilot programs in recent years that allow shareholders in certain funds to direct the asset managers on how they'd like to vote on certain issues.
In other words, these firms are acknowledging that it's your money they're putting into markets, not theirs. And if you don't like the way they vote on your behalf, there's a chance these changes could soon allow you to make your voice heard.
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