Index-fund boom sparked by Vanguard makes it crypto's biggest backer

Bitcoin is not “appropriate” for long-term investors. Also, digital assets are more a speculation and less an investment. And they’re an “immature asset class” with little history and “no inherent economic value” that can wreak “havoc” on portfolios. 

Vanguard Group Inc. executives, channeling the logic of the venerable Jack Bogle, have made their opinions on crypto clear. Yet thanks to the cold logic of index investing, the $10 trillion money-management giant is now the biggest backer of Strategy, the software firm that famously reinvented itself as a proxy for Bitcoin and became a poster child for the industry’s ambitions.

Vanguard owns more than 20 million shares, nearly 8%, of all of Strategy’s outstanding Class A common stock, and likely surpassed Capital Group Cos. for the no. 1 spot sometime in the fourth quarter, according to data compiled by Bloomberg based on regulatory filings. The dozens of Vanguard mutual funds and ETFs that hold the stakes track everything from small- and mid-cap benchmarks to momentum, value and growth gauges, among others. 

It’s an ironic twist for an asset manager that’s held an unbending stance on cryptocurrencies. The firm spoke out last year when Bitcoin exchange-traded funds launched in the US, saying it wouldn’t allow their trading on its brokerage platform, and announced at the time that it had no plans to start its own crypto-centered products given their “speculative” nature. “We don’t believe it belongs,” said Tim Buckley, Vanguard’s chief executive at the time. It’s “really tough to think about how it belongs in a long-term portfolio.”

“God has a sense of humor,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence and author of The Bogle Effect. “Vanguard chose this life. When you have an index fund, you have to own all the stocks, for better or worse, and that includes stocks that you may not like or approve of personally.”

The company formerly known as MicroStrategy Inc. has built a name for itself making large-scale bets on Bitcoin. Run by crypto evangelist Michael Saylor, it issues debt and equity in order to fund those purchases, a blueprint that’s now being emulated by dozens of other firms looking to replicate Strategy’s roughly 3,400% surge since it began the initiative in 2020.

With a cache of more than $70 billion, it’s currently the largest corporate holder of the token, and Saylor has become one of the industry’s most prominent backers. He owns just under 20 million Strategy shares himself, according to the company’s most recent proxy statement.

“The fact that Vanguard holds such a large stake in Strategy is a powerful signal of growing institutional support for Bitcoin and for Bitcoin Treasury strategies,” Saylor said in a response to questions. “It reflects the increasing acceptance of Bitcoin as a legitimate reserve asset within the traditional financial community.”

Strategy’s rally means that even if Vanguard’s stash of shares may not have been intentional, the ownership has paid off handsomely in recent years. The company’s more than 850% advance in the past two years alone far surpasses Bitcoin’s 300% gain.

Strategy gained another 3.2% Monday as Bitcoin topped $123,000 for the first time.

“Even though Vanguard hasn’t embraced crypto directly, many of its clients are getting indirect exposure through MicroStrategy in Vanguard’s passive indexes,” said Roxanna Islam, head of sector and industry research at ETF shop TMX VettaFi. “That shows how embedded crypto has become in traditional indexes and client portfolios, sometimes without many even realizing it.”

To be clear, Vanguard’s massive stake in Strategy is hardly unique for the money manager. As investors have continued to flock to its index-tracking funds in recent years — swelling assets under management to more than $10 trillion — it’s become the top shareholder of roughly 400 companies in the S&P 500, according to data compiled by Bloomberg.

Strategy isn’t currently part of the benchmark, though it recently was included in the widely followed Nasdaq 100 gauge. Vanguard’s single biggest stake in the company is in its $1.4 trillion Total Stock Market Index Fund (VITSX), which has 5.7 million shares, worth roughly $2.6 billion. Other major holders include its $91 billion Vanguard Extended Market Index Fund (VIEIX), with 3 million shares, and its Vanguard Growth ETF (VUG). The firm’s total Strategy stake is worth about $9.26 billion.

Vanguard’s exposure to Strategy extends beyond its passive products. One of its actively managed mutual funds — meaning that its portfolio managers have discretion over what it holds — had a small number of Strategy shares as recently as February, data compiled by Bloomberg show. Another one of its momentum factor ETFs, which is actively managed under the ticker VFMO, also holds a small position. 

Vanguard says that those funds’ holdings of Strategy shares don’t necessarily signal conviction either — the mutual fund, VSEQX, uses model-driven quantitative techniques to build its portfolio and is benchmarked against a small- and mid-cap index. VFMO, meanwhile, utilizes a rules-based quant model to rank stocks.

A representative for Vanguard declined to provide further comment.

Bloomberg Intelligence’s Balchunas, whose book chronicles Vanguard’s meteoric rise over the past 50 years on the back of its unwavering dedication to low-cost index products, says that beyond their divergent views of crypto, there’s a striking similarity between Strategy and Vanguard.

“I do find the ‘hodler’ mentality that Saylor has — he says he’ll never sell his Bitcoin — very Vanguardian,” Balchunas said, referencing a crypto-community term that denotes devotion to a token even during selloffs. “Being totally committed — that’s a very Vanguardian mindset.”