Jack Bogle is rightfully being celebrated upon his passing for the great contributions he made to the retail investor and the investing world. The founder of Vanguard Group and inventor of the index fund was the champion of low-cost index investing for decades and helped many investors to build substantial wealth while limiting their risk.
While we will hear much about Bogle's remarkable legacy and how it has changed investing, there have been several other consequences of his efforts that have caused major changes in the market.
The first is that his push toward indexing has been one of the main driving forces in reducing commissions in nearly all areas of the market. To compete with low-priced index funds, brokers have had little choice but to cut commissions and fees. The disparity in performance was simply too great to justify when the other positives of indexing are considered.
Passive investing, indexing and lower commissions have led to another development that is not viewed as favorably, however. A huge percentage of the market is now in very large baskets of stocks and all those stocks tend to move in correlated fashion. When someone sells their position in the S&P 500 they sell a little of all 500 stocks. There is no attempt to separate the "good" stocks from the "bad." Everything is sold regardless of merit.
This past December we had a good illustration of what happens when investors dump their passive index funds. It can create greatly volatility as the selling feeds on itself. All stocks are crushed because investors sell them all when they escape poor action.
That kind of action has reversed in recent weeks, but we will continue to have this highly correlated movement at times because there are now so many assets in the passive funds that Bogle championed.
The good news is that indexing does create greater pricing inefficiencies in individual stocks, and that does lead to better opportunities. On the other hand, it makes for more randomness in the market as the fundamentals of individual stocks are largely ignored when you are buying and selling index funds.
Bogle has probably made more impact on the structure of the market than anyone but there are some negative consequences to passive investing as well.