[est31]

> If you own a piece of every company, like Vanguard or BlackRock, your funds benefit when the whole economy does well.

Index funds only target top companies. Externalities tend to b eenefit those top companies while harming little companies as well as poor people, often not even in the same country.

[mushufasa]

Index funds are limited to public companies, which implies a certain size. That said, across a fund manager's assets are a lot of small cap and mid cap funds, which explicitly target smaller companies. In that sense, index funds do not only target the top companies.

If you mean top as in performance, that is also not the case. Index funds are based on the premise that they do not aggressively pick winners and losers within a sector, in contrast to active funds. This lets index funds hire fewer staff and charge fewer fees. Economists generally agree that over time, index funds outperform active funds on a risk-adjusted basis after accounting for fees.