Indirect Effects of Indirect Investment

I can’t say enough about index investing.  The best, perhaps only, free lunch in investing is diversification.  And index funds are superb instruments with which to achieve diversification.  There is, however, a potential dark side.   Don’t worry, this dark side won’t effect you much… not really.  At least not directly.

What has me a bit worried is “giving up the vote.”   Yup, when you buy shares of an EFT, mutual fund, other fund you forfeit your voting rights to the underlying shares.  Say you own 1000 shares of SPY.  Cool.  That means you own a couple shares of Apple and a handful of XOM shares.  But, guess what?  You can’t vote them!

Do I care that I am giving up my votes to iShares?  Not enough not to buy ETFs.  But I care a little bit.  Enough to mention it in my finance blog.

The term “indirect investment” is not precise because saying “direct investment in stock” is perhaps not technically correct.  Nonetheless, I am slightly annoyed at institutions voting my shares.  I’d rather these shares not get voted… so that direct shareholders would not get overridden by institutional votes.  Better yet, I’d like to be able to set some parameters for how my shares should get voted.  Difficult to implement… but I’d like it.

So while index ETFs are the best thing since sliced bread, finding a solution to shareholder disenfranchisement would be a welcome improvement.

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