The world’s largest investment fund is now larger than Spain’s GDP

The world’s largest investment fund, the Vanguard Total Stock Market, is now worth more than Spain produces in an entire year. The fund has assets valued at 1.55 trillion euros, after growing by 229 billion so far this year and doubling in five years. After this colossal advance, the figure exceeds Spain’s Gross Domestic Product (GDP) in 2023: 1.46 trillion euros. It is also larger than the size of Norway’s sovereign wealth fund (1.3 trillion euros). In addition, this macro fund is 90 times larger than Spain’s largest investment fund.

Vanguard is the second largest asset manager on the planet, behind only BlackRock, and has been the pioneer in the marketing of indexed or passive investment funds. These are products that replicate the performance of an index, such as the Nasdaq, the Ibex or the S&P 500. Since there is no need to analyse companies and make investment decisions, the fees for these products are very low. In the case of the aforementioned Vanguard Total Stock Market, its management fee is only 0.03% per year, while in active funds it can far exceed 1.5% per year. For an investment of 10,000 euros, the difference is paying three euros per year versus paying 150.

Mutual funds such as Vanguard Total Stock Market have been attracting more and more money for years. In addition to their low fees, academic literature has repeatedly shown that active fund managers are unlikely to consistently beat their benchmark. Why pay the fund manager 1% a year if it cannot do better than the benchmark?

The Vanguard Total Stock Market Index was created in 1992 and tracks the performance of all publicly traded companies in the United States—large, medium and small, a total of 3,500 stocks—unlike the S&P 500, which tracks only the 500 largest. The fund dates back to 2000. Over its nearly 25-year history, it has generated an average annual return of 9%.

The second largest private investment vehicle in the world is the Vanguard 500 Index Investor, which tracks the performance of the largest listed companies and has assets of 1.1 trillion euros. According to Morningstar data, among the 10 largest funds in the world there are eight managed by Vanguard. All of them are worth more than 200 billion euros and all are passively managed. Among these giants there are also investment vehicles from Fidelity, Capital Group and Pimco, according to Morningstar figures.

Comparing the size of an economy like Spain’s with a fund has the problem that GDP is a flow variable – it measures everything that is produced in a country in a year – and the size of a fund is a variable of stock —the value of all assets owned by the fund is taken into account—, but what is at stake is to establish an order of magnitude. And the magnitude of this type of investment vehicle is colossal. An accumulation of assets only comparable to those of the large sovereign funds. In this case, owned by private hands, by millions of individuals and companies.

However, to put the dimensions of the Vanguard macro fund into perspective, it can be compared to the largest investment fund of a Spanish fund manager. It is the CaixaBank Rendimiento Monetario and has assets of 17 billion euros. In other words, the American fund is 90 times larger. And this is despite the fact that the CaixaBank fund has broken all records in Spain, where it is rare for an investment vehicle to exceed 10 billion euros.

The enormous size that passive or indexed investment management is acquiring has raised some warning signs. Some argue that it makes money dumber, because the shares are not selected based on their fundamentals, but only on whether or not they are included in an index. This would exacerbate the trends. However, it should be remembered that only a small proportion of the ownership of listed companies is controlled by index funds, since they also have among their shareholders the founders, private investors, pension plans, hedge funds… who would provide more grey matter.

In the United States, fearing that asset managers such as Vanguard and BlackRock could acquire excessive power, the country’s Federal Deposit Insurance Institute (FDIC) has proposed establishing a moratorium on them not being able to exceed 10% of banks’ capital. But, in parallel, other legislators have also attacked these large asset managers for allegedly prioritising political motives over financial objectives. BlackRock, for example, was the target of criticism from the Republican Party for using environmental, social and governance (ESG) criteria when investing.

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