The CBOE Volatility Index has averaged 20.5 over the past decade. If it were 45 percent higher, that would bring it to nearly 30, or 20 percent higher than where it was at the peak of last year's high-yield debt concerns and not much lower than where it was during much of the worries about European debt in 2012. And that would be the average level of volatility based on a market where just 20 percent of all equity is indexed. The VIX traded as high as 80 during the financial crisis, which means already at times of stress the VIX, which is called the market's fear gauge, could get up to 120, or about 10 times where it is now.
Income Inequality
Income inequality is already a problem in America. Index funds are making it worse. A study published last year by the European Corporate Governance Institute examined the compensation of the top five highest paid executives for each company in the S&P 1,500 plus 500 other public companies. It found that executives at companies in industries with high common ownership were paid 25 percent more than executives in industries with lower levels. What's more, CEOs received most of the excess pay gains. After controlling for other factors, the study found that CEO pay tends to jump 10 times as much as the pay of the other top executives after a rise in passive ownership.
The compensation study also found that as index fund ownership of a company rose, the pay of top executives was more closely tied to the performance of the industry than that of their own company. The higher the level of passive ownership, the study found, the more a sort of reverse competition started to dominate an industry. The fallout: If the market were mostly index-owned, executives might actively work to help their rivals, at least if they wanted to see their paychecks grow.
According to the Economic Policy Institute, the current ratio of CEO pay to average worker pay is 271 to 1. If index funds come to dominate the market, CEOs could soon make $338,000 for every $1,000 paid to the average employee.
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