Index funds have become increasingly popular in recent years, as they offer investors a low-cost way to track the performance of a particular market index but diminishes the efficient allocation of capital, the principal work of the stock market. Warren Buffett, the legendary capital allocator and CEO of Berkshire Hathaway, has expressed concerns about the impact of index funds on capital allocation. In his 2017 annual report to shareholders, he wrote:
"Index funds are a wonderful thing for investors who don't know what they're doing. But for those who do, they're a very expensive way to get average results."
Nothing could be more average than the S&P 500, an index fund that contains the top five hundred U.S. publicly traded companies and which has no interest in interacting with those companies, reviewing their annual reports and proxy voting for their Board of Directors. The same could be said for other Index Funds and exchange traded funds (ETF). The point being there is no attempt by these Funds to discern whether their companies are executing well or just riding along on coattails allowing for showcase directors to rubber stamp exceptional executive compensation for unexceptional result.
