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Vanguard Is Growing Faster Than Everybody Else Combined

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Re: Vanguard Is Growing Faster Than Everybody Else Combined

#41

Post by krit_dms »

candiodari wrote: post #31
NTDF9 wrote: post #9

Here's a question for someone more savvy than me. What happens if the vast majority of stock investments end up in vanguard funds? In an economic crises, will everyone try to sell the same set of funds and will crash the funds themselves?

Here's how it works. An ETF or Fund like vanguard is a company that issues "coupons" and then buys and sells them (and various related administrative things, e.g. forwarding dividends while combining them). So when you buy an ETF "share", what happens is that you buy a newly issued coupon from this company. This company gets notified, and as a result will put in market orders for these shares (while combining them in…

Almost.

When you buy an ETF, you don't buy a newly issued cupon. You buy it from another market participant on an exchange - hence Exchange traded fund. What you're describing is closer to classic mutual fund. Each ETF will have "Authorized Participants" who make sure that the ETF mirrors the underlying assets.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#42

Post by warcher »

I'm fascinated at how Vanguard's essential idea plays out over the long term.

The basic value proposition seems to be that Wall Street is extracting more value in fees than they're making in smart stock picks. Which thus far has been pretty accurate, but is the contribution of stock pickers actually zero? Is it negative? Where do we reach a fixpoint, and how? Do the stock pickers, clever scamps that they are, figure out a way to take advantage of the Bogleheads and their naivete? Are they already doing so? Is this going to turn the stock market into just one big house of cards?

I mean, don't get me wrong, I absolutely buy that Wall Street is a bunch of crooks-- it's a hell of a lot easier to extract fees from your customers than it is to beat a market full of highly motivated Ivy Leauge MBAs. But where does it stop? If I've seen any trends in the financial markets, it's that every good idea will eventually be flogged to death, usually with catastrophic results.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#44

Post by stygiansonic »

NTDF9 wrote: post #9

Here's a question for someone more savvy than me. What happens if the vast majority of stock investments end up in vanguard funds? In an economic crises, will everyone try to sell the same set of funds and will crash the funds themselves?

This doesn't answer your question directly, but Matt Levine has written some great articles, in particular, about index funds and their effect on the market.

Here's one: [1]

"Second: One of my little stock-market obsessions is that index funds free-ride on the work done by active investors. Someone needs to make decisions that allocate capital to businesses. A world in which everyone indexes, and in which no one thinks that active managers should be able to charge for their services, is a world that will spend too little time and effort on allocating capital to the right businesses. That's not the world we live in: A lot of people still actively work to allocate capital..."

1. https://www.bloomberg.com/view/articles/2015-07-07/can-you-r...

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#45

Post by krit_dms »

NTDF9 wrote: post #38
candiodari wrote: post #31

Earlier quoted context omitted.

Here's how it works. An ETF or Fund like vanguard is a company that issues "coupons" and then buys and sells them (and various related administrative things, e.g. forwarding dividends while combining them). So when you buy an ETF "share", what happens is that you buy a newly issued coupon from this company. This company gets notified, and as a result will put in market orders for these shares (while combining them in…

Great explanation! Thanks! >> So to answer your questions, in a flash crash scenario as an ETF owner you'll experience more lag in both cases So the lag is due to inability to quickly buy/sell the percentages that were allocated for different stocks to build a share, right? And if I understand correctly, this means if people keep their emergency funds in ETFs, in a crisis, they probably won't be able to access those…

Authorized participants (APs) exist for all ETFs. their purpose is to make sure that the ETF mirrors the underlying assets, and to provide liquidity.

Consider a ETF that consists of a single stock. IF the stock drops, the AP will lower its Bid/offer spread, and force the ETF down to the same level as the stock. But as this is a reaction to the stock falling, there is going to be a lag between the stock falling, and the ETF falling. This doesn't mean that you can sell the ETF at a higher price, necessarily.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#46

Post by kirrent »

warcher wrote: post #42

I'm fascinated at how Vanguard's essential idea plays out over the long term. The basic value proposition seems to be that Wall Street is extracting more value in fees than they're making in smart stock picks. Which thus far has been pretty accurate, but is the contribution of stock pickers actually zero? Is it negative ? Where do we reach a fixpoint, and how? Do the stock pickers, clever scamps that they are, figure…

I've read people who theorise that as index funds grow larger their shortcomings increases the rewards for more active traders who now have more opportunities available that aren't being taken advantage of by those index funds, no matter how closely and quickly they track a given index. Presumably that theory would lead to some equilibrium between the two investing styles.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#47

Post by blibble »

candiodari wrote: post #31
NTDF9 wrote: post #9

Here's a question for someone more savvy than me. What happens if the vast majority of stock investments end up in vanguard funds? In an economic crises, will everyone try to sell the same set of funds and will crash the funds themselves?

Here's how it works. An ETF or Fund like vanguard is a company that issues "coupons" and then buys and sells them (and various related administrative things, e.g. forwarding dividends while combining them). So when you buy an ETF "share", what happens is that you buy a newly issued coupon from this company. This company gets notified, and as a result will put in market orders for these shares (while combining them in…

this isn't how ETFs work at all

have a read about the ETF redemption mechanism[1]: it is almost the exact opposite to the way mutual funds work (which is what you have described)

their behaviour at times of stress is correspondingly different to that of a mutual fund

http://www.investopedia.com/articles/mutualfund/05/062705.as...

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#48

Post by Animats »

With index funds so big, who determines prices? An index fund tied to the S&P 500 just buys stocks in the proportion that they're in the S&P 500. The price of the stock plays no role in that decision. At some point, this has to create problems, but so far it hasn't. It does mean the active traders, who are basically moving the same money around all day, have an outsized influence on prices.

Index funds are so successful because managed stock funds, as a class, underperform the market indices. So do hedge funds, which are a net lose for their investors. People are finally aware that Wall Street's stock pickers mostly aren't very good.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#49

Post by etherael »

harry8 wrote: post #39
etherael wrote: post #14

Earlier quoted context omitted.

Thought experiment. Imagine you have a class full of studious and competent students, they do well on exams and generally display the performance characteristics and output you'd expect from a class full of studious and competent students. Then the rules change. From here on in, plagiarism is no longer a code violation. The obvious happens, everyone copies from the smartest kid in the class, measured by the heretofor…

This analogy has its limitations but let's go with it a small way. Everyone has the choice to copy who they think is smart or write their own answer. Each person compares the expected value of writing their own answer with copying whoever they think is smart. Some win, some lose. As it gets harder to work out who is smart yet everyone is copying, beating that average becomes easier. That proportion of the class who a…

You're absolutely right, it does have its limitations, and they show in the issues you raised with it in a way that doesn't actually apply to the nature of the analogy as it criticises the original situation under examination. The nature of indexing is such that it's treated by practitioners as if it were an "objectively correct" (and obvious, no question about where the volume is flowing, the numbers are right there.) answer to the correct investment allocation, so it isn't actually so much the case that there are people just copying random other picks because they like their haircut or it's a popularity contest or whatever (although I suppose you can still make the argument that you're making some kind of decision in an index based on which index fund you're allocating your investment to, but even there you could take a no favourites approach by indexing index funds.)

The core point I was trying to make though is that the market is efficient in net across a great variety of actors all making their own judgement with regards to how much a given thing is worth because it's assigning so many eyeballs and independent evaluations to the pricing question for a given item.

When you swap that out and replace it with a system in which n% of the trade volume is just copying the rest of the trade volume, that reason applies inversely proportional to the volume that such indexing takes place, until a market with just one guy calling all the shots and everyone else indexing him may as well just be centrally planned, and thus afflicted with all the heinous cancers thereof.

Your point about the deleterious effects of the above also simultaneously lowering the bar on the challenge of beating the average though is something I hadn't thought of, and is completely correct. I guess that is how indexing would collapse when you got to some state where the market was mostly just ignorantly following the tiny minority of organic judgement being exercised, and that tiny minority turns out to be inadequate. The market then recovers by stock picking once again being conducted by specialists, and as you say, this would be a situation wherein stock picking was massively undervalued, as opposed to the (maybe present?) situation where it was massively overvalued.

Thanks for the book reference, I'll definitely check it out.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#50

Post by warcher »

kirrent wrote: post #46
warcher wrote: post #42

I'm fascinated at how Vanguard's essential idea plays out over the long term. The basic value proposition seems to be that Wall Street is extracting more value in fees than they're making in smart stock picks. Which thus far has been pretty accurate, but is the contribution of stock pickers actually zero? Is it negative ? Where do we reach a fixpoint, and how? Do the stock pickers, clever scamps that they are, figure…

I've read people who theorise that as index funds grow larger their shortcomings increases the rewards for more active traders who now have more opportunities available that aren't being taken advantage of by those index funds, no matter how closely and quickly they track a given index. Presumably that theory would lead to some equilibrium between the two investing styles.

I'm crossing my fingers for the ol invisible hand evening this whole thing out-- Wall Street takes a haircut on fees until they reach pricing equilibrium. It's not like financial analysts are without value. I just don't know if they deliver the value they extract. Bogle made a pretty compelling argument that they do not.

Is there a doomsday scenario, haha?

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