Elon Musk and Cathie Wood knock passive index investing, saying it’s gone too far

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Elon Musk and Cathie Wood took aim at index funds in a Twitter thread, arguing that passive investments have controlled too big a percentage of the stock market.

The CEO of Tesla responded to a post by venture capitalist Marc Andreessen, who said giant asset managers like BlackRock have outsized voting power in Corporate America because of their increasingly popular index funds. Musk agreed with Andreessen, saying passive investing «has gone too far.»

«Decisions are being made on behalf of actual shareholders that are contrary to their interests! Major problem with index/passive funds,» Musk tweeted.

Ark Invest's Wood joined the conversation Wednesday, saying investors in index funds like the S&P 500 ETF missed out on Tesla's 400-fold appreciation before it was added to the equity benchmark.

«In my view, history will deem the accelerated shift toward passive funds during the last 20 years as a massive misallocation of capital,» Wood added.

Wood has become one of the most high-profile active managers on Wall Street. Her flagship ARK Innovation ETF, with Tesla as its biggest holding, has suffered a brutal year so far amid rising rates, dropping nearly 45%.

Passive investments such as index funds and exchange-traded funds have taken up about 60% of the equity assets, stealing market share from active rivals, according to JPMorgan estimates. Money has flooded into passive products as investors have been attracted by their lower management fees during booming bull markets. The market for index funds has reached $6 trillion, while the market for ETFs has ballooned to $5 trillion since the SPDR S&P 500′s inception in 1993.

Over the last few decades, index investing has also performed much better as most active