The March 24rd edition of Morningstar’s Rekenthaler Report takes a closer look at fund king Vanguard, and columnist John Rekenthaler tackles the question of whether the mind-boggling growth and dominant position of the fund firm poses any current or future risks to the financial system as a whole.

Vanguard dominating fund industry

Vanguard Mutual Funds

As Rekenthaler points out, Vanguard is the most dominant fund company ever. It manages the largest stock mutual fund in the world, and it soon will manage the largest bond mutual fund. Moreover, although the firm just recently got into the exchange-traded fund sector, it’s already neck in neck with iShares for new U.S. ETF sales over the past year.

By the same token, no fund firm has experienced anything like Vanguard’s 2014 net inflows of $219 billion into U.S. mutual funds and ETFs. American Funds broke the $50 billion mark back in 2003, but Vanguard has set the pace ever since.

Vanguard Mutual Funds

Of note, seven years of industry-leading sales have led to Vanguard enjoying a record market share. Prior historical fund sector leaders controlled between 10% and 15% of total industry assets, but Vanguard closed last year with a 19% market share. The fund titan could even have 21 or 22% market share by the end of 2015.

Vanguard mainly runs passive funds

Another key point is that most of Vanguard’s products are passive funds, but they are exclusively cap-weighted, and are not focused on a “strategic beta.” This means that Vanguard’s passive funds do not have to make trades to re-align with markets. Also, most Vanguard assets are in highly liquid securities, and Rekenthaler notes that “even its active funds follow a mainstream, low-turnover approach.”

Rekenthaler says Vanguard’s size is not really a risk factor

Rekenthaler admits his “headline “What Happens When Vanguard Owns Everything?” is of course a cheat; Vanguard will never literally own the whole stock market. Nor, I suspect, will it ever have even a bare majority.”

He also points out the belief that Vanguard has grown too big to be safe, and that the indexing industry has grown too big has become common among analysts and individual stock investors. There’s really nothing to worry about Rekenthaler says, as Vanguard’s current situation is quite different from earlier industry leaders. He argues that “while indexing may eventually undercut itself through its own success, that time has not yet arrived.”