According to a new report, which is likely to make John Bogle a bit angry – index funds suck. The report  from Wintergreen Advisers, large index fund families such as BlackRock, Vanguard and State Street (although they also have active managed strategies) are just “following the herd” with their investments, which over time, creates investment portfolios with overly concentrated positions in a relatively few high-flying stocks. The report also highlights that stock index funds have been fully supportive of the out of control compensation packages for senior corporate executives over the last decade or so.

Report authors David Winters and Liz Cohernour explain their perspective: “The sad reality is that index funds have turned ordinary investors into the pawns in a game that undermines the integrity of American markets and imposes costs on society that don’t show up in index fund expense ratios. We believe that one consequence of this is that billions of dollars of value created by American companies are being diverted to a select few executives, while ordinary investors, distracted by “low fee” hype, are subjected to dangerous risk concentrations in their retirement portfolios.”

Big index funds dominate S&P 500 ownership

Stock Index Funds

The assets of index fund giants Vanguard, BlackRock and State Street have turned them into the biggest shareholders of U.S. in most large publicly traded companies. These funds hold an average of 16% of the shares outstanding in the 25 largest companies in the S&P 500.

Stock index funds support high exec pay

Stock Index Funds

Winters and Cohernour analyzed the voting histories of the leading S&P 500 index funds run by Vanguard, BlackRock and State Street over the past five years related to the 25 biggest companies in the S&P 500. It turns out that, over the last five years, these stock index funds have cast their votes in support of executive equity compensation plans a mind-boggling 89% of the time, and voted against exec compensation less than 4% of the time. By the same token, these large index funds withheld or cast votes against directors a mere 4% of the time.

Dangerously concentrated retirement portfolios

Stock Index Funds

The report also emphasizes that “index hype creates an illusion of safety and diversification that we believe leads ordinary investors to take on a dangerously high concentration of risk in their investment portfolios.”

They calculate that the largest 25 securities by market value in the S&P 500 in 2014 represented more than 33% of the total return of the S&P 500, and the top 25 securities by performance contributed 55% of the index’s total return. In fact, Apple, Microsoft, Facebook and Intel as a group represented more than 20% of the total return of the index in 2014.

Stock Index Funds

Many investors include Winters’ “arch nemesis” Warren Buffett will likely disagree with the conclusions, but judge for yourself.

See full PDF below.