Stock Strategist (ETF Edition): Much Ado About Nothing--The Impact of Diversified Funds on Competition

[Morningstar Logo]( [Company Site]( [Company News]( [Membership]( [Portfolio]( [Stocks]( [Options]( [Funds]( [ETFs]( [Markets]( [Tools]( [Personal Finance]( [Discuss]( Stock Strategist (ETF Edition) Much Ado About Nothing--The Impact of Diversified Funds on Competition A new line of research suggests that diversification across stocks in an industry can reduce competition, but that argument is weak. [tab_bar] by Alex Bryan, CFA | 1/10/2018 6:00:00 AM Does common ownership of stocks in the same industry reduce competition? That is the central question that an emerging body of academic research is seeking to address. While this research is still in its early stages and the evidence is inconclusive, the policy reactions it might elicit could be significant for investors. Some proposals have suggested limiting an asset manager's holdings to one stock in each industry where its ownership stake in a firm exceeds 1%, which would effectively ban large index funds, and preventing asset managers that own two or more competitors from exercising their voting rights. (Morningstar's Aron Szapiro explains why these policy recommendations are problematic in his article, "[Would Policymakers Target Index Funds?]( But the u nderlying argument that common ownership leads to less competition relies on some misguided assumptions. At the heart of this argument is the idea that shareholders who own multiple firms in the same industry (common owners) have an incentive to maximize industry profits, rather than individual firm profits. So, they behave in ways that concentrated investors wouldn't, by not pressuring managers to compete aggressively, or otherwise using their influence to discourage competition and boost industry profits. Jose Azar (an economist at IESE Business School) and his colleagues developed this argument in two studies (1, 2) that found that an increase in common ownership in the airline and banking industries was associated with higher prices for the services those firms offered. To read more, click [here](. Sponsored Links [Buy a Link Now]( New: ETF Managed Portfolios Center On [MorningstarAdvisor.com]( Tap into the industry's best source of information on ETF strategies for financial advisors. See key performance data, screen for specific strategy attributes, and learn more about this fast-growing area of the investment marketplace. [Click to get started](. Free Issue | Morningstar's Stock Newsletter >> Morningstar StockInvestor is celebrating more than 10 successful years of high-quality stock investing. Its two real-money portfolios have outperformed the S&P 500 since 2001. [Get new ideas for the core of your stock portfolio]( ). Search Most Recent Articles [5 Hot Takes From CES Unveiled]( [The Year in Bond Funds -- 2017]( [Retirees: What You Should Watch in 2018]( Latest Analyst Reports [Boston Partners Long/Short Rsrch Instl]( [Vanguard Market Neutral Inv]( [Natixis Oakmark International A]( [Oakmark International Investor]( [Touchstone Sustainability & Imp Eq A]( ABOUT OUR EMAIL TO UNSUBSCRIBE this email address to the Stock Strategist newsletter, please click "reply" and then click "send." This will unsubscribe only this email address to this specific newsletter. All subscription changes will take effect within one business day. Replies are not read by individuals, so please do not use this for queries about Morningstar.com. If you have questions about Morningstar.com or your membership, send a note to [joe@morningstar.com](mailto:%20joe@morningstar.com). ABOUT OUR PRIVACY POLICY Please [click here]( to learn about Morningstar's privacy policy. (c) Copyright 2018. Morningstar, Inc. 22 West Washington Chicago, Illinois, 60602 All rights reserved.