The Quiet Cartel: How Index Funds Are Reprogramming Capitalism Through Passive Power

By Emily Zhao Jul. 28, 2024

Capitalism once celebrated competition—the invisible hand of markets guiding countless firms toward efficiency. But in the age of passive investing, that invisible hand increasingly belongs to three fingers: BlackRock, Vanguard, and State Street. As of 2025, these three institutions collectively manage US$26.3 trillion—roughly one-quarter of all global equity value (OECD Global Asset Management Survey, 2025). They are the largest shareholders in 88 percent of S&P 500 companies and hold majority stakes in thousands of firms across every major sector (Financial Times Ownership Database, 2025).

The index fund revolution promised diversification and democracy in investing. Instead, it has concentrated economic power on a scale unprecedented in history.

The Rise of the Passive Empire

Index funds began as a humble innovation. In 1976, Vanguard founder John Bogle launched the first fund designed to track, not beat, the market—a way for ordinary investors to share in capitalism’s gains without paying Wall Street’s fees. Half a century later, the “passive revolution” has turned those index funds into capitalism’s central nervous system.

According to the World Bank Capital Allocation Study (2025), passive funds now own 64 percent of all U.S. equity ETFs and 37 percent of global institutional assets. Because these funds buy automatically—mirroring index weights—they cannot divest easily, even from firms engaging in anticompetitive or unethical behavior.

This transforms ownership into obligation: capital without conscience.

Common Ownership, Common Control

The consolidation of ownership creates what economists call common ownership concentration: when the same few shareholders hold major stakes across competing firms in the same industry.

The Harvard Law School Corporate Governance Review (2025) found that in the U.S. airline sector, the “Big Three” asset managers collectively own 52 percent of shares across the four largest airlines. The result? Less incentive for price competition, higher fares, and synchronized corporate behavior—without any formal collusion.

It is antitrust without a meeting. The market remains free in name, but its decisions increasingly move in one synchronized rhythm—the tempo of passive capital.

The Politics of Apathy

Passive investing reshapes not just markets but democracy. Institutional investors wield enormous voting power over corporate boards, executive compensation, and environmental policy. Yet index funds—by design—abstain from active engagement.

In 2024, BlackRock alone cast 10 million proxy votes across 17,000 companies worldwide, yet fewer than 1 percent involved consultations with retail investors (OECD Proxy Governance Database, 2025). In practice, a handful of executives in New York decide the governance of global corporations from energy to pharmaceuticals—quietly, bureaucratically, and without public accountability.

Shareholder democracy has become a technocracy.

The Passive Paradox: Competition Without Competitors

The IMF Structural Market Efficiency Report (2025) reveals that common ownership across competing firms raises prices by 12 percent on average and reduces R&D spending by 15 percent. This does not mean collusion—it means alignment. When every competitor’s largest shareholders are the same three institutions, profit maximization replaces competition as the market’s true function.

Passive investing thus creates a paradox: by seeking to eliminate risk through diversification, it eliminates the competitive tension that gives capitalism its moral legitimacy.

The invisible hand has become an index.

The ESG Mirage

To counter criticism, asset managers now champion Environmental, Social, and Governance (ESG) investing—presenting themselves as ethical stewards of corporate behavior. But beneath the branding lies selective activism.

The London School of Economics Sustainable Finance Audit (2025) found that 72 percent of ESG-labeled funds hold fossil fuel, weapons, or surveillance companies in their portfolios. BlackRock, the world’s largest asset manager, retains US$170 billion in fossil fuel exposure even as it markets “net-zero” funds.

ESG has become the moral hedge of passive capitalism: ethical language masking inert capital.

The Algorithm as Shareholder

Today, the average retail investor does not buy stocks—they buy algorithms that buy stocks. Index tracking is increasingly governed by quantitative models that rebalance portfolios without human discretion. The MIT Sloan Digital Markets Review (2025) notes that over 85 percent of global ETF trades are now executed algorithmically, often within milliseconds of index updates.

Ownership itself has been automated. No one—not even the managers—can meaningfully explain why or when certain companies receive capital inflows.

The market has become a mirror reflecting its own motion.

The Political Economy of Passivity

Passive investing reframes capitalism as infrastructure. Asset managers now influence corporate governance, monetary policy, and even public welfare through their sheer scale. BlackRock alone advises nine central banks and manages over US$500 billion in government pension funds (World Economic Forum Global Institutional Capital Study, 2025).

When the same entities that own the world’s corporations also guide public policy, the distinction between private influence and public authority dissolves.

The passive revolution, it turns out, is anything but neutral.

Regulating the Invisible Cartel

The OECD Market Concentration Taskforce (2025) proposes four interventions to prevent financial democracy from devolving into oligarchy:

1. Voting Power Separation – Cap any institution’s aggregate voting rights across competing firms at 5 percent.

2. Public Index Governance – Require major index construction methodologies to be publicly disclosed and audited.

3. Beneficial Ownership Transparency – Force institutional investors to reveal ultimate decision-makers behind proxy votes.

4. Antitrust Coordination – Extend competition law to include common ownership concentration as a criterion.

These measures would not dismantle passive investing—but they would return its passivity to capital, not to citizenship.

The Morality of Inaction

The genius of index capitalism is that it operates without visible villains. No CEO sets out to distort markets, no regulator explicitly allows it, and no investor consciously participates. Yet collectively, the system drifts toward a corporate oligopoly camouflaged as efficiency.

In this quiet concentration lies a deeper question: what happens when capitalism stops competing? A market that cannot choose is no longer a market—it is a mechanism.

The invisible hand, once a metaphor for freedom, has become an autopilot.

Works Cited

“Global Asset Management Survey.” Organisation for Economic Co-operation and Development (OECD), 2025.

 “Ownership Database.” Financial Times, 2025.

 “Capital Allocation Study.” World Bank, 2025.

 “Corporate Governance Review.” Harvard Law School, 2025.

 “Proxy Governance Database.” Organisation for Economic Co-operation and Development (OECD), 2025.

 “Structural Market Efficiency Report.” International Monetary Fund (IMF), 2025.

 “Sustainable Finance Audit.” London School of Economics (LSE), 2025.

 “Digital Markets Review.” Massachusetts Institute of Technology (MIT) Sloan School of Management), 2025.

 “Global Institutional Capital Study.” World Economic Forum (WEF), 2025.

 “Market Concentration Taskforce Report.” Organisation for Economic Co-operation and Development (OECD), 2025.