Cathie Wood calls indexing 'a form of socialism'. Pot kettle black?
- Robin Powell
- 59 minutes ago
- 10 min read
When Cathie Wood declared index funds "a form of socialism", she joined a decades-long tradition of active managers attacking passive investing on ideological grounds. But the evidence tells a different story: index funds often hold company boards to account more effectively than the very active managers making these claims — yup, including Cathie Wood.
Cathie Wood sent a tweet the other day. "Isn't it sad, if not damning," she wrote, "that institutional shareholders rely on proxy firms to tell them how they should vote? Index funds do no fundamental research, yet dominate institutional voting. Index-based investing is a form of socialism. Our investment system is broken."
The ARK Invest founder wasn't venting casually. Her frustration centred on how major index fund providers had voted on Tesla's proposal to award Elon Musk what she called "the mother of all pay packages". In her view, passive investors who conduct no company research had no business wielding such voting power. Active managers like ARK, she implied, are better stewards of capitalism.
If Wood is right, the implications run deep. Trillions in pension savings and retirement accounts sit in index funds. If these vehicles genuinely undermine free markets and corporate governance, investors face a stark choice: financial efficiency or capitalist principles.
But if she's wrong, investors are being misled by ideology disguised as analysis. This matters particularly because Wood's attack follows a familiar pattern: when active managers struggle with performance, they often pivot to non-performance arguments about values, stewardship and the health of capitalism itself.
Wood is entitled to her opinion. But when researchers examined the data, they found something awkward: ARK votes with company management more often than the index funds she criticises. This pattern extends far beyond one proxy fight.
Here's what the evidence shows.
Cathie Wood is plain wrong
The proxy voting data
Jeffrey Ptak pulled the actual voting records for a post on his excellent Substack blog, Basis Pointing.
Ptak examined ARK's proxy voting over the year ended 30 June 2025, alongside proxy data for Vanguard Total Stock Market Index Fund. He chose Vanguard because Wood had mentioned the late Vanguard founder, Jack Bogle, in her thread.
To make a fair comparison, Ptak focused on the 121 stocks both funds held in common. ARK invests in concentrated hyper-growth names. Vanguard's fund invests in the entire US stock market. The overlap provided an apples-to-apples comparison.
By Ptak's count, ARK cast votes on 1,195 proposals across those 121 stocks. Of these, 1,138 favoured the proposal, 57 opposed it, three were abstentions. ARK voted with management in 1,186 of these votes.
That's 99.2% of the time.
Vanguard voted with management 98.5% of the time on the same proposals.
That's right. Vanguard, the supposedly free-riding socialist, put up a stiffer fight than the research-driven capitalist Cathie Wood.
Vanguard, the supposedly free-riding socialist, put up a stiffer fight than the research-driven capitalist Cathie Wood.
ARK's high agreement rate makes sense given their strategy. They invest in businesses they believe boast transformational technology that will unleash growth. If you're that convinced, you're unlikely to vote against proposals left and right. You've already bought into what management is selling, governance included.
But this reality undermines the stewardship claim. If active managers vote with management even more than index funds, where's the superior accountability?
The irony cuts deeper. Wood wasn't criticising index funds for voting against management too often. She was criticising them for not supporting management enough - specifically, for not rubber-stamping Musk's compensation package. This isn't about holding boards accountable. It's about wanting compliant shareholders.
The structural governance evidence
The proxy voting numbers reflect deeper structural realities about how active and passive managers approach governance.
Research from the European Corporate Governance Institute found that active managers who pick stocks aren't likelier to adopt issuer-specific shareholder engagement. Active management doesn't automatically mean better governance.
The incentives explain this. Index funds cannot exit. If you own the entire market, or substantial portions of it, you must care about long-term governance. You're locked in. Poor governance at any major holding damages your returns permanently.
Active managers can sell. Unhappy with governance? Move on to the next opportunity. This exit option reduces pressure for sustained engagement.
Size matters. Major index fund providers like Vanguard, BlackRock and State Street have built dedicated stewardship teams precisely because their ownership stakes are both large and permanent. They must engage. They have nowhere else to go.
Active managers with high turnover have weaker governance incentives. Why antagonise management over board composition when you're trading in and out every few months? You might need access to that management team for your next stock idea.
There's a conflict active managers rarely discuss: they don't want to anger the companies they invest in. Good relationships mean better access to information, management meetings, investor days. Voting against management risks souring those relationships.
The academic evidence on governance outcomes
The claim that active managers deliver superior governance outcomes has been tested rigorously. The results are more complex than industry rhetoric suggests.
Heath et al. (2020) examined whether index funds actively monitor portfolio companies. Their findings undercut the active management narrative: passive funds show little evidence of effective engagement and are less likely to vote against management. But this doesn't mean active funds excel. The research reveals a more nuanced picture where neither strategy demonstrates clear governance superiority across all contexts.
Board independence provides a useful test case. Appel et al. (2016) found that passive investors, despite not conducting company-specific research, secured more independent boards and reduced takeover defences through their large voting blocs. This contradicts the assumption that research-driven active management automatically translates to better board oversight.
The voting behaviour evidence challenges both sides' claims. Hshieh et al. (2020) found no difference between passive and active funds in voting for governance reforms. When advocates claim active managers provide superior stewardship, they're asserting a distinction the data doesn't support.
"When advocates of active management claim superior stewardship, they're asserting a distinction the data doesn't support."
Earnings management offers another governance benchmark. Farooqi et al. (2019) and Chiang et al. (2012) found that firms with concentrated active ownership experienced statistically significant reductions in earnings management. This suggests active management can improve governance outcomes - but only under specific conditions involving ownership concentration.
The moderating factors matter enormously. Chiang et al. (2012) showed active investors have greater impact in family-controlled firms. Dong et al. (2022) found passive ownership's positive effect on audit quality strengthens in firms with higher agency costs. Bevza and O'Hagan Luff (2024) identified a curvilinear relationship where passive ownership's governance impact changes at different ownership levels.
These nuances reveal why blanket claims about active superiority mislead. Farizo (2020) found index funds are more likely to oppose management when not co-held in active funds - suggesting passive funds can provide monitoring precisely when active ownership doesn't constrain them. Adib (2019) showed index funds allocate monitoring resources strategically to pivotal votes, increasing passage of value-creating proposals whilst reducing value-destroying ones.
This matters because active managers often cite governance superiority to justify higher fees. The academic evidence doesn't support that justification. In some contexts, with concentrated ownership, active management improves outcomes. In others, passive funds deploy voting power more effectively. In many situations, there's no meaningful difference.
The evidence reveals active management's governance advantage is conditional, inconsistent and certainly not worth the fee premium in most cases.
The UK evidence
The pattern crosses borders.
Over the past three years, 80% of active funds in the Investment Association's UK All Companies sector have underperformed the FTSE All-Share index. When active managers struggle this comprehensively with their core task, claims of superior governance need strong evidence.
That evidence hasn't materialised. No clear UK data shows active funds deliver better governance outcomes than index funds. What we have suggests complexity, not active superiority.
The ESG dimension offers another test. If active managers excel at stewardship and engagement, their ESG-labelled funds should shine. But as FT Adviser reported in May 2024: "Not a single UK equity fund in our ESG database achieved first quartile performance over the past three years."
The logic gap is stark. Active managers aren't delivering returns. They're not demonstrably delivering superior governance outcomes. What justifies the higher fees?
The performance deflection
Understanding why ideology arguments emerge requires examining returns.
Since Wood's December 2021 forecast that ARK's strategies could deliver a 30-40% compound annual rate of return over the next five years, ARK Innovation ETF has lost 3% per year. That index fund "doing no fundamental research"? Up nearly 11% annually over the same period.
The longer view tells a similar story. Since ARK Innovation's October 2014 inception, the fund has delivered 13.56% annualised returns. The S&P 500 over the same period: 15.00% annualised. ARK achieved lower returns with more than double the volatility.
Wood's specific forecasts have proven optimistic. In March 2021, ARK predicted Tesla would reach $1,000 per share (split-adjusted) by 2025 - a near-quintupling from the stock's price at that time. Tesla is up 101.6% cumulatively since that call, compared to the S&P 500's 83.1% gain. Decent performance. A quintupling? Not close.
None of this proves ARK's approach is wrong. Markets humble everyone, forecasts are difficult, even skilled managers face disappointing stretches. But it reveals a pattern.
When performance disappoints, the debate shifts. Instead of "do you deliver returns?", the question becomes "are you destroying capitalism?" The focus moves from measurable outcomes to unmeasurable values. From evidence to ideology.
"When performance disappoints, the debate shifts from 'do you deliver returns?' to 'are you destroying capitalism?'"
This shift isn't unique to ARK. As 80% of UK active funds underperform, rhetoric about passive investing being "worse than Marxism" intensifies.
These pivots serve commercial interests. Active managers charge higher fees. When returns don't justify those fees, you need another justification. Appealing to capitalism, governance and moral superiority provides it.
The logic is straightforward. If you can convince investors that choosing active management is about values rather than returns, you've created a different competitive advantage. One that doesn't require beating the market.
The recurring pattern
Wood's "socialism" framing feels fresh because it's attached to current events. The argument itself has deep roots.
At a Charles Schwab investment conference in 1995, Rex Sinquefield — who had helped develop one of the first market-capitalisation weighted S&P 500 index funds and co-founded Dimensional Fund Advisors — reflected on parallels between free markets and passive investing.
"It is well to consider, briefly, the connection between the socialists and the active managers," Sinquefield observed. "I believe they are cut from the same cloth. What links them is a disbelief or skepticism about the efficacy of market prices in gathering and conveying information."
His conclusion: "So who believes markets don't work? Apparently it is only the North Koreans, the Cubans and the active managers."
Sinquefield delivered these words during the early stages of index fund adoption, when passive investing was still building credibility. Nearly 30 years later, with trillions in index funds and overwhelming evidence of effectiveness, active managers still deploy the same rhetoric.
The pattern reveals something about these claims. They're not primarily analytical arguments subject to evidence. They're defensive positioning by an industry under commercial pressure. That doesn't make them automatically wrong. It does suggest healthy skepticism about their motivation.
Why the myth persists
Despite decades of contrary evidence, the "indexing undermines capitalism" argument endures. Understanding why helps.
Active management feels more capitalistic. It involves picking winners and losers, making bold calls, backing conviction with capital. There's a satisfying narrative: smart people doing research, making decisions, getting rewarded or punished. It appeals to our sense of how capitalism should work.
Index investing seems passive. The word itself suggests inaction. Buying everything in the market and holding it feels like opting out of the competitive process that makes capitalism function.
This intuition misleads. Index funds don't prevent price discovery. They depend on it. They're not parasites on the system; they're efficient participants in it. But the intuition persists because it maps onto deeper beliefs about effort, reward and market participation.
The business incentives are clear. Active managers charge higher fees. They need justification. When superior returns don't materialise consistently, they need a different value proposition.
There are legitimate concerns about index fund growth, but they're more nuanced than sweeping "socialism" claims. What happens if passive investing reaches 80% or 90% of the market? Are there concentration risks with proxy voting power at three firms? How do we ensure stewardship quality scales with asset growth?
Real questions. But framing index funds as fundamentally un-capitalistic or governance-destroying obscures rather than illuminates them.
What investors should know
"The only thing index funds undermine is the business model of underperforming active managers."
The evidence supports a clear conclusion: index funds aren't socialism. They're efficient expressions of market capitalism.
Governance records show index funds often equal or exceed active managers in holding boards accountable. The "undermining capitalism" rhetoric intensifies when active performance weakens. Not coincidental.
Index funds support capitalism precisely because they lower costs, allowing more capital to remain invested and compound. They increase market efficiency by eliminating wasteful trading costs. They democratise investing, making sophisticated diversification available to ordinary investors, not just the wealthy. Their voting power derives from millions of investors choosing them freely. This is capitalism working.
Real governance questions exist. Concentration of proxy voting power at major index fund providers deserves examination. We should scrutinise whether stewardship resources scale appropriately with assets. Potential conflicts at large asset managers merit attention.
These legitimate concerns differ from apocalyptic claims about destroying free markets. They call for oversight and refinement, not abandonment.
For investors making allocation decisions, the lesson is straightforward: don't let ideology override evidence. Active managers who attack indexing on non-performance grounds are often struggling to deliver returns. Let data on fees, performance and governance drive your decisions, not rhetoric about capitalism.
When someone claims index funds undermine free markets, ask for evidence. Ask how their own governance record compares to the index funds they're criticising. Ask why this concern intensifies when performance disappoints.
Wood is entitled to her frustration about the Tesla vote. She's not entitled to mischaracterise index fund stewardship to serve it. After decades of this rhetoric and mountains of contrary evidence, one conclusion stands: the only thing index funds undermine is the business model of underperforming active managers.
In a functioning capitalist system, that's exactly what should happen.
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