The Growing Peril of Index Funds: Too Much Tech • Hacker News Board

Re: The Growing Peril of Index Funds: Too Much Tech

#41

Post by pedrocr » Thu, Dec 28, 2017, 9:43 PM UTC

brndnmtthws wrote: post #9

This is an inherent property of all market cap weighted indexes. An alternative approach is equal weighted indexes, which have historically outperformed market cap weighted indexes. There's no free lunch though: this is a case of your typical risk/reward tradeoff. Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds. Some of them feature equal weighting acros…

>Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds.

But do they outperform after risk adjustment? I doubt it and if not you're better off just leveraging a bit to your desired level of risk. The point of passive investing isn't that the trading strategy can be automated, the point is to say "I want to grab exactly the average return of the market every year". Trying to do anything else is by definition not achievable by everyone so why do people think they should be the lucky ones? What specific advantage does a retail investor bring to merit that?

Re: The Growing Peril of Index Funds: Too Much Tech

#42

Post by Tehdasi » Thu, Dec 28, 2017, 9:46 PM UTC

yborg wrote: post #37

rsync wrote: post #34

Earlier quoted context omitted.

"Theoretically, is not another growing peril of indexing that it removes incentives for companies to behave well or outperform, since if they're part of an index their shares will be bought automatically by retirement plans and investors anyway, irregardless of performance or competency?" You don't have to look far to find this ... a great example is Restoration Hardware, which very recently borrowed money to buy bac…

The crowd's wisdom extends to the indexer. Another issue with these index-linked funds is that they create a single point of failure, i.e. the few people at Russell that curate the index. It would be very very easy for someone to, um, externally compensate an individual or two at Russell to include a dog in the index for the purpose of a massive stock pop. Similar to the bond-rating agency fiasco(s) leading up to the…

This is possible but unlikely.

Bond rating agencies can more easily get away with mischaracterising "new and innovative" products than index funds can cheat investors.

Index funds publish their methodology, and there is very little subjectivity (if any) in the application of these rules, that is after all, the point on an index fund. It would be far too easy to sue index funds if there were to defraud investors, and depending on the action and jurisdiction, criminal charges.

Also if there was an issue with governance with index funds, going to a fund where governance is even more subjective would hardly seem to be an answer.

Re: The Growing Peril of Index Funds: Too Much Tech

#43

Post by pedrocr » Thu, Dec 28, 2017, 9:47 PM UTC

brndnmtthws wrote: post #10

notadoc wrote: post #7

Well you could always avoid the tech heavy indices, but then you're sort of actively managing your positions rather than letting it be purely passive. Theoretically, is not another growing peril of indexing that it removes incentives for companies to behave well or outperform, since if they're part of an index their shares will be bought automatically by retirement plans and investors anyway, irregardless of performa…

This is not quite correct. There are other weighting methods (specifically, equal weighting) which would prevent this situation, whilst still remaining passive.

I'd argue an equal weighted index is no longer passive. You're actively making a bet that smaller companies will outperform bigger companies. Someone else will be taking the other side of that bet. Me with my cap weighted index will get the average of the two and be actually passive.

Re: The Growing Peril of Index Funds: Too Much Tech

#44

Post by statguy » Thu, Dec 28, 2017, 10:01 PM UTC

mcknz wrote: post #20

statguy wrote: post #12

Earlier quoted context omitted.

I suspect we will reach an equilibrium where most people are indexing and a few very good active managers are in play, while most of the less competent managers have been booted out. There might be a few swings towards either side on the way to that steady state.

The problem is that the pool of "few very good active managers" is changing all the time. And if you happen to find an outperforming active manager, it's like buying high -- managers, like the market, always revert to the mean.

I totally get what you are saying, I am just saying that people will still fall for active managers like they do today, although in far fewer numbers and active managers will not completely go away. Also, when almost all people are indexing there will be a few arbitrage opportunities for active managers.

Re: The Growing Peril of Index Funds: Too Much Tech

#45

Post by matt_wulfeck » Thu, Dec 28, 2017, 10:03 PM UTC

brndnmtthws wrote: post #17

hendzen wrote: post #16

Earlier quoted context omitted.

What you want is an equal risk weighted SPY ETF - where each component is weighted such that the contribution to total volatility is equalized. This can be done using some off the shelf risk models from firms like MSCI. There was such an ETF (ERW), but it never really took off, and it no longer trades. Unfortunately these methods will just remain available to only more sophisticated market participants.

There's still a lot of opportunity for new types of passive index funds, using methods like you suggest. Maybe someone will start an up.

My hunch tells me specialized funds won’t beat cap weighted indexes from places such as Vanguard because of fees.

Re: The Growing Peril of Index Funds: Too Much Tech

#46

Post by repsilat » Thu, Dec 28, 2017, 10:41 PM UTC

bpicolo wrote: post #28

JoshTko wrote: post #25

"Tech" in this case is an overly broad classification. Apple, Amazon, and Facebook are all very different businesses and should not have correlated performance.

Logistics, hardware, advertising. All very different for sure. Every successful business has to be “tech” in this century. Tech is how you achieve high scale

Yeah, if "tech" just means "many employees are programmers" or "has a large online presence" it seems obvious that tech is going to become a larger portion of the market, and rebalancing to cut down the "overweight" tech in your portfolio runs directly counter to what passive cap-weighted investing is about -- having investments that follow what has won in the past and is expected to win in the future.

Re: The Growing Peril of Index Funds: Too Much Tech

#47

Post by bitxbit » Thu, Dec 28, 2017, 10:45 PM UTC

avar wrote: post #5

The second edition of Jack Bogle's "Little Book of Common Sense Investing" came out this last October. It goes into detail in evaluating active investment such as what's being recommended in this article v.s. passive investment. Plainly put, I've yet to see any compelling evidence that the supposed experts being quoted in this article can time the market as they're suggesting with their suggestion of getting out of t…

Increase in passive/beta investing is not necessarily good for the economy. We are going through an extraordinary period for levered beta.

Re: The Growing Peril of Index Funds: Too Much Tech

#48

Post by sliverstorm » Thu, Dec 28, 2017, 10:59 PM UTC

avar wrote: post #5

The second edition of Jack Bogle's "Little Book of Common Sense Investing" came out this last October. It goes into detail in evaluating active investment such as what's being recommended in this article v.s. passive investment. Plainly put, I've yet to see any compelling evidence that the supposed experts being quoted in this article can time the market as they're suggesting with their suggestion of getting out of t…

This isn't about timing the market, it's about rebalancing and maintaining a good diversity of exposure to various sectors. Rebalancing is not antithetical to passive investing.

Re: The Growing Peril of Index Funds: Too Much Tech

#49

Post by dbecker » Thu, Dec 28, 2017, 11:12 PM UTC

avar wrote: post #5

The second edition of Jack Bogle's "Little Book of Common Sense Investing" came out this last October. It goes into detail in evaluating active investment such as what's being recommended in this article v.s. passive investment. Plainly put, I've yet to see any compelling evidence that the supposed experts being quoted in this article can time the market as they're suggesting with their suggestion of getting out of t…

This article is talking about diversification to reduce risk, which is unrelated to "timing the market" and which can be consistent with passive investing.

Re: The Growing Peril of Index Funds: Too Much Tech

#50

Post by avar » Thu, Dec 28, 2017, 11:41 PM UTC

dbecker wrote: post #49

avar wrote: post #5

The second edition of Jack Bogle's "Little Book of Common Sense Investing" came out this last October. It goes into detail in evaluating active investment such as what's being recommended in this article v.s. passive investment. Plainly put, I've yet to see any compelling evidence that the supposed experts being quoted in this article can time the market as they're suggesting with their suggestion of getting out of t…

This article is talking about diversification to reduce risk, which is unrelated to "timing the market" and which can be consistent with passive investing.

Some investors described in the article moved from market cap weighted indexes to ones that were disproportionately weighted to disfavor tech stocks, they believe that they're overvalued and that they can get out earlier than everyone else.

That's trying to time the market.

The firms mentioned in the article will be happy to charge you much higher fees than Vanguard for questionable longer term returns. It's basically a PR piece for managed investment.