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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

#81

Post by bdonlan »

ipsum2 wrote: post #70
loeg wrote: post #57

Earlier quoted context omitted.

> With index funds so big, who determines prices? ... At some point, this has to create problems, but so far it hasn't. Any active trader remaining in the market. Fortunately, active traders still make up a large part of the market. And the bigger indices grow, the larger the opportunities for active traders to profit. It's not a real problem — it's self-correcting.

> And the bigger indices grow, the larger the opportunities for active traders to profit. I'm having trouble understanding why this is the case. Care to clarify?

Index funds buy or sell blindly, at whatever the prevailing best price is. Naturally, if there were only index funds in the market, the price would vary randomly.

That being said, consider what would happen if stock prices did start to vary randomly - if you had actual research suggesting the price was too high or too low, you could trade accordingly. This would net you a profit, and also help push the price in the opposite direction, towards whatever a reasonable price is.

The larger the deviation from the "correct" price, the larger the potential profits are to be had. So if the problem ever starts to be significant (i.e. a few cents of deviation caused by index funds), this means a very large potential profit for any active funds or traders out there. And so we would expect the system to reach an equilibrium - where there are just enough active funds and traders to snatch up the profits that arise from tiny price errors and distortions caused by index funds. In effect, the index funds are paying those remaining active funds and traders a tiny "management fee" (in the form of exploitable trading behavior) to figure out the appropriate price of stocks for them!

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#82

Post by mikekchar »

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…

This may sound snarky, but it's not meant to be. When I've worked in large corporations I was astounded by the amount of... shall we say "irregular" stock activity. For a while I've been struck with the thought that you could probably make a pretty good living simply buying long stock the day before executive stock options are issued and then selling them again when executives are selling theirs (either through planned trades or when blackouts are lifted).

Interestingly (for me, anyway) the very large places I've worked at often let the peons listen to the analysts meetings over the phone system. Again, I was shocked by the complete lack of knowledge that analysts at big investment houses have in the companies they were analysing. They would be completely unaware of large acquisitions, law suits and any number of things that even the casual observer would know about. I really got the impression that their job was literally to attend the meeting and report the company's projections. The company's could get away with murder because nobody was paying attention to what they were doing.

Not sure if things have tightened up since that time in my life. I haven't worked for a big company since the early 2000's, but somehow I get the impression that there are probably plenty of ways to ride on the coattails of less than scrupulous executive compensation.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#83

Post by bdonlan »

nabaraz wrote: post #30
xwvvvvwx wrote: post #19

If all vanguard does is buy (not pick) stocks for you, why wouldn't you just skip the fee and buy the stocks yourself?

1. Most of the people just want to set their allocation and no think about it more than a few times a year. 2. Without Vanguard(and other index funds), you do not quality for admiral shares. 3. Vanguard's fees are among the lowest(last time i checked it was between 0.1-0.5%). There is no charge for buying and selling Vanguard funds. 4. Vanguard is non-profit. ~I am no way affiliated with Vanguard.

Admiral shares are a function of the Vanguard mutual funds themselves; if you're buying the underlying companies directly, "admiral shares" don't matter, since you're not paying management expenses at all.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#84

Post by gcb0 »

bdonlan wrote: post #81
ipsum2 wrote: post #70

Earlier quoted context omitted.

> And the bigger indices grow, the larger the opportunities for active traders to profit. I'm having trouble understanding why this is the case. Care to clarify?

Index funds buy or sell blindly, at whatever the prevailing best price is. Naturally, if there were only index funds in the market, the price would vary randomly. That being said, consider what would happen if stock prices did start to vary randomly - if you had actual research suggesting the price was too high or too low, you could trade accordingly. This would net you a profit, and also help push the price in the o…

stock prices Do vary randomly.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#85

Post by [deleted] »

bdonlan wrote: post #81
ipsum2 wrote: post #70

Earlier quoted context omitted.

> And the bigger indices grow, the larger the opportunities for active traders to profit. I'm having trouble understanding why this is the case. Care to clarify?

Index funds buy or sell blindly, at whatever the prevailing best price is. Naturally, if there were only index funds in the market, the price would vary randomly. That being said, consider what would happen if stock prices did start to vary randomly - if you had actual research suggesting the price was too high or too low, you could trade accordingly. This would net you a profit, and also help push the price in the o…

[deleted]

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#86

Post by kennethh »

awjr wrote: post #80
ipsum2 wrote: post #70

Earlier quoted context omitted.

> And the bigger indices grow, the larger the opportunities for active traders to profit. I'm having trouble understanding why this is the case. Care to clarify?

You also have the situation that index funds must buy or must sell a stock if it enters or leaves an index. This creates an opportunity for active traders.

Most indexes are fairly predictable, so the changes are usually frontrunnered by index funds and traders.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#87

Post by dlubarov »

atemerev wrote: post #68

Of course. There wasn't a significant recession since 2009. It is psychologically very easy to buy into a rising market. When the next (inevitable) correction happens, the tide will change and stock pickers will return to the spotlight. (It might be not rational, of course. But markets are never rational. They are efficient — efficient in projection of our hopes and fears).

I don't think market conditions have much to do with it. Whether to invest in the market, or in a certain asset class, is a separate decision from whether to pick stocks or buy a passively managed fund.

Passively managed money has been increasing because there are more low-cost funds available, and lots of education about stock picking versus passively managed funds (e.g. Warren Buffet, A Random Walk).

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#88

Post by candiodari »

krit_dms wrote: post #41
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…

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.

I'm leaving that part out, because it obfuscates things. In one interpretation "Authorized Participants" on the exchanges keep the number of available "coupons"/shares at a fixed number.

So the market depth for any ETF should be constant, regardless of the value of the underlying assets (assuming non-extreme values and outside of crashes or rapid movements).

And yes, to be more exact, the market depth for an ETF should be a function of the amount of trading occuring in that ETF, not so much a constant. In any reasonable timeframe it should be constant.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#89

Post by SwellJoe »

ilyagr wrote: post #22

Vanguard seems to have gone a bit too far with cost-cutting in the customer services department. One of my most frustrating recent experiences was dealing with Vanguard's website and customer service. There were all kinds of issues, some minor annoyances, others serious time sinks. Here's an excerpt from a long and boring story: ... One day, I couldn't log in to their website. Attempting to go through "forgot my pass…

I don't understand how companies like that can thrive (but many do). If I have to pick up the phone to solve a problem even once, I'm angry. If I have to call them twice, I'm looking at alternatives. I may decide not to switch if the alternatives are even worse...but, I'm looking to get out of the shitty relationship I find myself in with that company. (This frustration is fresh in my mind because Security Metrics just told me to call them about PCI compliance...I refused, and will be going elsewhere for that service.)

Big finance seems particularly bad at user-facing technology. Which doesn't really give me confidence in their back end tech.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#90

Post by cJ0th »

loeg wrote: post #57
Animats wrote: post #48

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 success…

> With index funds so big, who determines prices? ... At some point, this has to create problems, but so far it hasn't. Any active trader remaining in the market. Fortunately, active traders still make up a large part of the market. And the bigger indices grow, the larger the opportunities for active traders to profit. It's not a real problem — it's self-correcting.

> And the bigger indices grow, the larger the opportunities for active traders to profit. It's not a real problem — it's self-correcting.

I appreciate that finally someone puts forward a rational argument as to why index fonds will keep working. Books and online resources tend to not take a critical look at the system at all or they offer an answer along the lines of "Trust me!"

Having said that, only hindsight is 20/20! It feels like we are rushing into the next great financial experiment. In a complex world there is simply no telling what's actually going to happen. I assume (any sources?) that currently more money than ever is flowing into index fonds. Furthermore, chances are this is just the beginning. For instance, the buy-and-hold hype is just arriving in Europe. Blogs and online communites on this topic are currently mushrooming here! Yesterday I even saw an ad on Germany's biggest TV station right before the evening news. This is very unusual to say the least as the common people of Germany by and large have an incredible amount of distrust in anything but savings books! This current gold rush mood is just scary to me as usually, when something hits mainstream media, the magic is gone!

Anyhow, the question I am asking myself is: What will the market do now that it has access to more cash than ever? Are the markets even productive enough to put those sums of money to good use? Or is this bonanza just FU-money that encourages more reckless behavior?

I can only speculate as to what is going to happen but my hunch is that in the long term the gap between returns from index fonds and savings books is going to become a great deal smaller as more people are willing to shoulder risk for companies and thus risk premiums go down. There may still be active traders who try to find opportunities but I suspect structurally the percentage of passive investors will expand quickly and won't go back below today's percentage.

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