Half a century on, there is no sign of that. Over 50% of net assets overseen by American investment funds are in trackers, estimates the Investment Company Institute, an industry group. For funds focused on domestic stocks, the share is 64%. Whether through your own savings, a corporate pension scheme or a university endowment, you probably have a stake in at least one. Predictably, the professional stock-pickers whose lunch has been eaten are as furious as ever. “Worse than Marxism,” thundered Bernstein, a broker, in 2016. Last month Terry Smith, a favourite fund manager of British retail savers, spent much of his half-yearly investor letter blaming his long underperformance on “a market which is dominated by so-called passive or index funds”. Full disclosure: your columnist, who used to own units in one of Mr Smith’s funds, took this rant as his cue to sell them and reinvest in a global-equity tracker. On one count, however, Mr Smith is right. Bogle’s creation ranks among the most important financial innovations of the 20th century, and deserves its place in most investors’ portfolios. Yet the idea that index funds are passive is bunk. Over the past five decades these vehicles have reshaped markets— and investing in one involves plenty of choices. The most obvious decision is which index to track. Suppose you want exposure to European shares. Should you choose 50 of the biggest firms via the STOXX Europe 50 index or 396 via the MSCI Europe? Plenty of people “passively” invest in America’s stock-market by tracking the NASDAQ 100, a tech-focused bet that ignores whole sectors such as finance and real estate. Even if you opt for an index like the FTSE Global All-Cap, which captures over 10,000 firms across the whole world, why stop there? To a purist, true passivity entails buying the “market portfolio”, meaning an impractical one including all investible assets, from private credit and property to art and fine wine. A 60/40 split between a stock tracker and a bond tracker is an active decision (why 60/40?)—and a big one at that. Index funds themselves are not passive, either. Rodney Comegys, Vanguard’s head of equities, explains that managers have more discretion than many investors realise. At its launch, for instance, the First Index fund

was too small to buy every share in the S&P 500. So it “sampled” 300 or so of them, a practice others still use today. Managers can also trade to minimise taxable gains, or to avoid getting screwed when everyone knows they must rebalance (when a firm such as SpaceX joins an index, say). Some juice returns by lending stocks to short-sellers for fees. Most important, and worrying, index funds seem increasingly to influence asset prices. This is not just because they are so big. Prices are set by trades, and slow-trading trackers, even enormous ones, account for a tiny fraction of these. But a series of studies have suggested they nevertheless cause distortions. A particularly widely circulated one outlines the “inelastic markets hypothesis”. This finds evidence that the presence of fixed- allocation funds (such as trackers investing all their assets in shares) ensures $1 flowing into the stock-market pushes up overall market value by $3-8. Others have argued that flows into index funds disproportionately raise the share prices of the biggest firms. Perhaps, then, the popularity of index funds is storing up trouble, helping to inflate a stock-market bubble while also entrenching the dominance of a few corporate giants. Ironically, even that would not be an argument to divest. When share prices next crash, just as when they soar, trackers will clock their average—doing better than the average stock-picker, who will get the same return minus heftier fees. In 50 years’ time, it is a good bet that index funds will be mightier yet. ■ This article was downloaded by zlibrary from https://www.economist.com/finance-and-economics/2026/08/11/hooray-for-index-funds- just-dont-call-them-passive

Finance & economics | Same Fed, different day Kevin Warsh is struggling to escape his predecessor’s problems High inflation, weak jobs numbers and presidential interference trouble the Federal Reserve Aug 13th 2026 Kevin Warsh enjoys marking a “new chapter”. The newish chair of the Federal Reserve has invoked that writerly metaphor at nearly every public appearance since taking charge in May. He wants markets, politicians and households to understand that now things at the Fed will be different. Yet the first months of his tenure have stood out not for novelty but for continuity. Leaf back a year, to the summer of 2025. Then, Jerome Powell’s Fed was uncomfortably caught between wobbly jobs numbers and above-target inflation, fuelled by tariffs: a quintessential but fiddly central-banking dilemma. To that, Donald Trump added a more unusual political bind. The

president’s attempt to sack Lisa Cook, a Fed governor, over alleged wrongdoing on mortgage paperwork threatened to jeopardise the Fed’s independence. America’s central bankers might think twice before defying demands from the White House for lower rates if this could get them fired. A year on the same story holds, almost beat-for-beat. Inflation is still not back to the 2% target. The latest consumer-price figures for July, released on August 12th, showed that these rose by 3.4% year on year. Monthly “core” goods prices—excluding food and energy—picked up too, suggesting that companies are once again passing tariffs on to shoppers. Overall core inflation, which includes services, was a little more reassuring, at 2.5%. Still, above-target inflation has already persuaded several rate-setters to dissent in favour of higher rates. Markets now peg the odds of a hike at the Fed’s next meeting in mid-September at roughly 40%. Meanwhile, employment numbers point to the opposite risk: a softening economy in need of lower rates. America shed 23,000 jobs in July and previous months’ gains were revised sharply down. Despite Mr Warsh’s long-standing reputation as a rate-raising hawk, he might find that outcome a more comfortable one. Mr Trump bangs on about how he wants rate cuts at every opportunity. Then there is Ms Cook. In June the Supreme Court blocked Mr Trump’s effort to fire her and carved out special protections for the “unique” constitutional position of the Fed. Unfussed, the president has doubled down. On August 5th the White House wrote to Ms Cook reiterating that Mr Trump was considering firing her and giving her three weeks to respond. In a statement, Ms Cook’s lawyers called the allegations “baseless” and the Supreme Court precedent “clear”. Mr Warsh may have to wait for that new chapter. ■ This article was downloaded by zlibrary from https://www.economist.com/finance-and-economics/2026/08/12/kevin-warsh-is- struggling-to-escape-his-predecessors-problems

Finance & economics | Free Exchange When Japan buys yen, it unwinds a dangerous trade The world’s biggest carry trader begins to exit its position Aug 13th 2026 AMERICA’S TREASURY secretary, Scott Bessent, is used to making audacious bets against central banks. He once worked for Soros Fund Management, the hedge fund famous for “breaking” the Bank of England during the sterling crisis of 1992. But in late July Mr Bessent bet the other way, lining up alongside a central bank in defence of its currency. He dipped into America’s foreign-exchange reserves to help the Bank of Japan (BoJ) buy yen, which had weakened past ¥163 to the dollar for the first time since 1986. Mr Bessent was not shy about his latest trade. In a cabinet meeting partly open to the press, he left a to-do list visible on the Camp David conference

table: “Buy Japanese yen,” it said. His boss was also proud of the intervention. “We’re…very, very strong financially,” President Donald Trump proudly explained. “They wanted a little bit of help.” Japan was no doubt grateful. But it would be wrong to think of it as a helpless naïf. On the contrary, in teaming up with Japan’s government, America was joining forces with one of the biggest currency traders of all time—an institution accustomed to making bets on a scale that would make any hedge fund tremble. In its latest interventions the BoJ, acting on behalf of Japan’s finance ministry, may have spent more than $95bn, according to Reuters, a news agency. It sold the dollars for about ¥160 apiece. A big chunk of its reserves were accumulated when a dollar could be had for less than ¥100. In making the trade, therefore, Japan’s government was taking vast profits. Back-of- the-envelope arithmetic suggests it may have reaped as much as ¥5.7trn ($36bn). George Soros reportedly made about $1bn (worth some $2.4bn in today’s money) from betting against the pound. The government’s cross-border holdings have been good for its finances. In their paper titled “What About Japan?”, YiLi Chien of the Federal Reserve Bank of St Louis, Harold Cole of the University of Pennsylvania and Hanno Lustig of Stanford University calculate that the government, the BoJ and Japan’s public pension funds together hold foreign assets worth more than 56% of GDP. Over the quarter-century to 2023 these assets earned average annual returns of 5.8% (only a fraction of which have been realised through trades). What about the other side of the ledger? The public sector’s liabilities are chiefly in relatively low-yielding yen. The government sells bonds in its own currency, many of which have been bought by the central bank. The central bank in turn owes yen to the commercial banks which hold accounts with it. The public sector’s balance-sheet has thus benefited both from favourable currency movements and from the difference in yields between the foreign assets it owns and the yen liabilities it owes, known as the “carry”. “The sheer scale of Japan’s public sector holdings makes it the world’s largest carry trade investor”, as Mr Chien, Mr Lustig and Wenxin Du of Harvard University put it in another article.