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Martin Schmalz argues on Rational Reminder #435 that cheaper index funds can lower investors' overall welfare
Oxford professor Martin Schmalz, on Rational Reminder episode #435, argues that very cheap index funds push money from bonds into stocks, lifting prices and cutting future returns, and revisits his contested research linking shared fund ownership of airlines to higher fares.
From the Rational Reminder podcast episode of November 12, 2026 and cited sources: In a general-equilibrium model built with William Zame, index fees below roughly 0.20% draw money from bonds into stocks. [2] [11]
SOURCES[2] UCLA Anderson Review: index funds and lower future returns anderson-review.ucla.edu[11] Schmalz & Zame paper (UCLA PDF) anderson-review.ucla.edu
AT Pulse research deskPublished · Updated · 4 min read · AI-assisted analysisAI-assisted, not human-edited. Methodology Corrections Who owns this site
- What happened
- In a general-equilibrium model built with William Zame, index fees below roughly 0.20% draw money from bonds into stocks. [2] [11]
- Original source
- Rational Reminder podcast episode, independent perspective
- Brief by
- AT Pulse research desk AI-assisted; publisher and contact on the desk page
- When
- November 12, 2026 podcast episode published
- Covered
- Nov 12 edition
- Evidence
- 11 sources across 9 sites; no transcript
- 1Rational Reminder #435 episode pagerationalreminder.libsyn.com
- 2UCLA Anderson Review: index funds and lower future returnsanderson-review.ucla.edu
- 3Yahoo Finance: Vanguard settles coal antitrust suitfinance.yahoo.com
- 4Azar, Schmalz & Tecu (2018), IDEAS/RePEcideas.repec.org
- 5Dennis, Gerardi & Schenone (2022), EconPaperseconpapers.repec.org
- 6ECGI WP 837/2022 rebuttal (PDF)ecgi.global
Reach: not measured yet
In a general-equilibrium model built with William Zame, index fees below roughly 0.20% draw money from bonds into stocks. That raises prices and lowers expected returns. Aggregate investor welfare falls about 6–7% over 20 years, while investors new to stocks gain about 1.31% at a 0.10% fee. [2] [11]
Schmalz's 2018 Journal of Finance paper with Azar and Tecu linked rising common ownership on airline routes to higher fares. A 2022 critique says market shares explain the effect. The original authors reply that the critics' placebo test is mechanically tied to market shares because the panel is unbalanced. [4] [5] [6]
The antitrust question has reached the courts. In August 2025 a Texas federal court largely refused to dismiss a 13-state coal suit against BlackRock, Vanguard and State Street. In February 2026 Vanguard settled for $29.5 million without admitting wrongdoing. The case concerns coordinated climate stewardship, not passive ownership as such. [7] [8] [3]
According to the episode's show notes, common ownership is not limited to index funds, because active managers and family offices also hold stakes in competing firms. The notes also present delegated management as a commitment device that helps clients avoid costly behavioural mistakes, and they stress that fees and complexity compound over time. [1]
Index funds hold about half of mutual-fund and ETF assets, and the three largest managers own nearly a quarter of S&P 500 companies. If the model holds, falling fees shift returns between investor groups.
Read the full assessment
Large holders' antitrust exposure is already being litigated.
Executive brief
Martin Schmalz, an Oxford finance professor, argues that cheap index funds can leave investors as a whole worse off. In a calibrated model he built with William Zame, index fees falling below about 0.20% move money from bonds into stocks. That raises stock prices and lowers future returns. Over 20 years, aggregate investor welfare falls by roughly 6–7% (UCLA Anderson Review). He discusses this, and his disputed airline "common ownership" research, on Rational Reminder #435, published 12 November 2026. The antitrust angle has reached the courts: Vanguard paid $29.5M to settle a 13-state coal suit (Yahoo Finance).
What changed and event timeline
Airline common-ownership paper published
Azar, Schmalz and Tecu report in the Journal of Finance that changes in common ownership on a route correlate with ticket-price changes, and call reduced competition a hidden social cost ().
Critique and rebuttal
Dennis, Gerardi and Schenone argue in the Journal of Finance that the correlation comes from market shares, not ownership (). Azar, Schmalz and Tecu call that finding factually incorrect ().
Indexing-equilibrium results publicized
Schmalz and Zame's model finds that cheaper indexing raises stock prices, lowers expected returns and reduces aggregate welfare ().
Coal antitrust suit survives dismissal
A federal court in the Eastern District of Texas largely denied motions to dismiss by BlackRock, Vanguard and State Street. At that stage, it found the defendants did not qualify for the Clayton Act's passive-investor safe harbor (;).
Vanguard settles
Vanguard agreed to pay $29.5M and to stay out of climate-focused stewardship groups. It admitted no wrongdoing (;).
Episode #435 published
Schmalz covers equilibrium effects of indexing, common ownership, the Hart-Scott-Rodino Act and the Sherman and Clayton Acts, and why wealthy investors struggle to index ().
Capabilities and access
- Format: Rational Reminder is a podcast from PWL Capital, co-hosted by Benjamin Felix. Episode #435 is commentary, not new research (episode page).
- Underlying work: the 2018 Journal of Finance paper (IDEAS), the 2022 rebuttal as an open working paper (ECGI), and a Schmalz–Zame paper presented at the 2023 AEA meetings (AEA).
Technical analysis for researchers and developers
- Indexing model: a general-equilibrium setup where investors with different traits choose among bonds, stocks and a market index fund (UCLA PDF).
- Airline method: measures concentration with ownership adjusted for shared investors, then runs within-route panel regressions of price on that measure (IDEAS).
- Point of dispute: the critics' placebo test.
Read the full section
- Indexing model: a general-equilibrium setup where investors with different traits choose among bonds, stocks and a market index fund (UCLA PDF). The calibration uses 5,000 firms, $500M profit per firm, a fixed $2T of assets, and models bankruptcies (Anderson Review).
- Airline method: measures concentration with ownership adjusted for shared investors, then runs within-route panel regressions of price on that measure (IDEAS).
- Point of dispute: the critics' placebo test. The rebuttal says it is mechanically correlated with market shares because the panel is unbalanced, and proposes a different way to separate ownership from market share (ECGI).
Claims and evidence
- Aggregate welfare falls 6–7% over 20 years when fees drop below 0.20%: this is a calibrated model result, not an empirical measurement (Anderson Review).
- Investors new to stocks gain: about 1.31% at a 0.10% fee and more than 3% at fees near zero (Anderson Review).
- Common ownership raises airfares: contested. The critics attribute the effect to market shares (EconPapers), and the original authors dispute that (ECGI).
Read the full section
- Aggregate welfare falls 6–7% over 20 years when fees drop below 0.20%: this is a calibrated model result, not an empirical measurement (Anderson Review). The outlet is UCLA's own, and Zame is a UCLA professor.
- Investors new to stocks gain: about 1.31% at a 0.10% fee and more than 3% at fees near zero (Anderson Review).
- Common ownership raises airfares: contested. The critics attribute the effect to market shares (EconPapers), and the original authors dispute that (ECGI).
- Episode content: taken from the episode's published show notes only (episode page).
Context and prior work
- Index funds hold about half of mutual-fund and ETF assets, up from under 25% a decade earlier. BlackRock, Vanguard and State Street together own nearly 25% of S&P 500 companies (Anderson Review).
- The show notes say common ownership is not only an index-fund issue: active managers and family offices also hold stakes in competing firms (episode page).
Limitations, safety and contested findings
- The welfare figures depend on the model's assumptions and calibration.
- No independent replication settles the airline debate. Both sides published in, or in response to, the Journal of Finance.
- The Texas suit is about coordinated climate stewardship, not passive common ownership as such. Vanguard's settlement is not a court finding of liability (JD Supra).
Read the full section
- The welfare figures depend on the model's assumptions and calibration. The episode notes themselves warn against treating theoretical models as proof of real-world outcomes (episode page).
- No independent replication settles the airline debate. Both sides published in, or in response to, the Journal of Finance.
- The Texas suit is about coordinated climate stewardship, not passive common ownership as such. Vanguard's settlement is not a court finding of liability (JD Supra).
Business and practitioner implications
- Asset managers: the Texas ruling shows the Clayton Act's passive-investor safe harbor is being tested in court, which affects how managers vote and engage with portfolio companies (JD Supra).
- Researchers: the airline dispute is a worked example of how panel construction and placebo design can reverse a conclusion.
- Advisers: the episode treats delegated management as a commitment device that helps clients avoid costly behavioural mistakes. None of this is investment advice.
Read the full section
- Asset managers: the Texas ruling shows the Clayton Act's passive-investor safe harbor is being tested in court, which affects how managers vote and engage with portfolio companies (JD Supra).
- Researchers: the airline dispute is a worked example of how panel construction and placebo design can reverse a conclusion.
- Advisers: the episode treats delegated management as a commitment device that helps clients avoid costly behavioural mistakes. It also stresses how fees and complexity compound over time (episode page). None of this is investment advice.