Big tech’s dominance is straining the logic of passive investing

“Don’t lookaispNasdaq for the needle in the haystack. Just buy the haystack!” So wrote Jack Bogle, who founded Vanguard Asset Management in 1975 and brought index investment to a mass market. Subsequent decades proved him right. “Passive” strategies that track market indices, rather than trying to beat them, now govern nearly a third of the assets managed by global mutual funds. Since a stockmarket index weighted by company size is just the average of underlying share owners’ performance, it is impossible for investors, in aggregate, to beat it. In the long run, even professional fund managers do not.Yet today’s haystack has grown unusually top-heavy. Since the start of the year, America’s seven biggest corporate behemoths—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—have left the rest of the stockmarket in the dust. Giddy on optimism, investors have raised these firms’ combined value by 69%, a much larger increase than that seen in broader indices. The “magnificent seven” now account for 29% of the market value of the & 500, and a whopping 61% of the 100, up from 20% and 53%, respectively, at the start of the year.