Hidden Dangers of the Great Index Fund Takeover • Hacker News Board

Re: Hidden Dangers of the Great Index Fund Takeover

#41

Post by L_Rahman » Sat, Jan 18, 2020, 7:50 PM UTC

hughpeters wrote: post #33

This is such a fascinating problem. On the one hand Jack Bogle's invention of the index fund has been so good for retail investors but because the process currently requires a middle man - i.e. one of the big three - these index funds have slowly become bloated with power. What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors? Where each investor owns their portfolio o…

The actual mechanics of owning the shares is incredibly complicated. It’s unlikely that any of us have index fund holdings that represent integer share counts.

Handling stocks when they move in and of the index without spiking the price is a finely calibrated, high skill trading desk action.

Re: Hidden Dangers of the Great Index Fund Takeover

#42

Post by pishpash » Sat, Jan 18, 2020, 7:50 PM UTC

toomuchtodo wrote: post #3

adaisadais wrote: post #2

While this seems (incredibly) scary it makes me think that this could be a huge opportunity for entrepreneurs (and some are currently undertaking it). The fintech entrepreneur can carefully paint the picture of the dangers of the big 3 while advocating for smaller index funds for a smaller set of investors. This smaller set of investors can have stocks based on their individual goals and interests. You just duplicate…

You just described M1 Finance (custom funds users can construct). Google Warren Buffett’s Long Bet about passive vs active fund management (he won the passive argument). Even sophisticated active investors are having a tremendously difficult time achieving passive returns net fees. If you’re not a sophisticated investor, I’d implore you to be cognizant of the challenges you’ll face attempting active investment strate…

There are other use cases than returns, sometimes it has to do with availability of funds or tax issues that constrain the possibilities. Even something as simple as the full spectrum of risk tolerances and time-horizons isn't well served by existing index retirement funds (they all skew to be highly risky and equity focused). It's better to have the running of an index fund be a separate service from the selection of its holdings or the choosing of goals. Right now if you have a slightly different goal than the horde, you can only go to expensive active funds, advisors, or spend a great deal of time self-managing.

Re: Hidden Dangers of the Great Index Fund Takeover

#43

Post by elliekelly » Sat, Jan 18, 2020, 7:51 PM UTC

hughpeters wrote: post #33

This is such a fascinating problem. On the one hand Jack Bogle's invention of the index fund has been so good for retail investors but because the process currently requires a middle man - i.e. one of the big three - these index funds have slowly become bloated with power. What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors? Where each investor owns their portfolio o…

The average investor’s portfolio wouldn’t be large enough for them “self host” their own index fund. Most people probably couldn’t afford to buy even 1 share of each of the underlying companies their index fund holds. There’s also a lot of work/judgment calls that are made in the rebalance process and with corporate actions and such. Granted, not nearly enough to justify most of the fees. But unfortunately (as it stands right now at least) the only way the index fund really works for retail investors is by way of pooling money.

All that being said, I’m optimistic someone can come along and find a way to shake the industry up. The status quo is great for the investment industry and pretty shit for everyone else. Tale as old as time.

Re: Hidden Dangers of the Great Index Fund Takeover

#44

Post by mandelbrotwurst » Sat, Jan 18, 2020, 7:51 PM UTC

hughpeters wrote: post #33

This is such a fascinating problem. On the one hand Jack Bogle's invention of the index fund has been so good for retail investors but because the process currently requires a middle man - i.e. one of the big three - these index funds have slowly become bloated with power. What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors? Where each investor owns their portfolio o…

One reason is because an individual investor has to go through a broker-dealer in order to trade and that usually has fees associated with it. If retail trade volume went up, you would see those fees rise.

Re: Hidden Dangers of the Great Index Fund Takeover

#45

Post by mandelbrotwurst » Sat, Jan 18, 2020, 7:53 PM UTC

encoderer wrote: post #39

deadbunny wrote: post #37

Earlier quoted context omitted.

I think the problem with this would be brokerage fees for buying/selling. If a fund is rebalancing 10% of their holdings the fees are a rounding error, if I'm rebalancing 10% of mine as an individual the fees would be a noticeable percentage.

There are no brokerage fees anymore. But fractional share ownership is not widely popular and would require an aggregator anyway.

Are you aware of a firm that offers free trading in fractional shares?

Re: Hidden Dangers of the Great Index Fund Takeover

#46

Post by dkarras » Sat, Jan 18, 2020, 7:57 PM UTC

Forge36 wrote: post #35

hughpeters wrote: post #33

This is such a fascinating problem. On the one hand Jack Bogle's invention of the index fund has been so good for retail investors but because the process currently requires a middle man - i.e. one of the big three - these index funds have slowly become bloated with power. What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors? Where each investor owns their portfolio o…

Having spoken with few people, the process is still mostly people, building algorithms in Excel. Much of what drives decisions is research, and personal decision's, not automation. I've heard AI trading has done very poorly as the system isn't predictable, it's people making decisions in ways which can become self fulfilling prophesies. Algorithms when distributed would also fall victim to the fastest person benefiti…

But this is not supposedly true for index funds by definition. They are passive. They just buy whatever is in the index. No other decisions made.

Re: Hidden Dangers of the Great Index Fund Takeover

#47

Post by Saccharine1 » Sat, Jan 18, 2020, 7:57 PM UTC

hughpeters wrote: post #33

This is such a fascinating problem. On the one hand Jack Bogle's invention of the index fund has been so good for retail investors but because the process currently requires a middle man - i.e. one of the big three - these index funds have slowly become bloated with power. What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors? Where each investor owns their portfolio o…

I think there are a handful of problems with this post, one of them being that index funds are already in many ways "open source." Re: their investment choices the investments that go into an index are chosen by the creator of the index which is separate from the investment house. The investment company MUST simply follow the index and trade as the index indicates. The tracking accuracy may vary slightly between Vanguard, Blackrock, and others, but generally they're all tracking accurately using basically the same methods. Any investor can move their shares to any other investment house at any time.

Also each investor already owns their portfolio outright... it is simply housed at the investment company. There is an absolute avalanche of regulation making that not just desirable but necessary. To remove a brokerage house from this equation would first require the complete and utter destruction of the global economic system (highly unlikely).

Every investor has the ability to choose funds crafted based on moral guidance or active management, which would spread out voting power more than it currently is. People are by and large not choosing that option at the moment.

Re: Hidden Dangers of the Great Index Fund Takeover

#48

Post by [deleted] » Sat, Jan 18, 2020, 7:58 PM UTC

javagram wrote: post #20

chrisstu wrote: post #12

I think there’s a bigger issue with passive inversing. Once an equity is in a cap weighted index like the S&P 500 with a high weighting, like Apple, can’t we end up in a situation where the individual company performance is irrelevant? Nobody will sell Apple because they just own it through their SP500 fund. As long as they are buying and holding the index fund, Apple remains at a high valuation. The only thing that…

AAPL and similar stocks do show their share price changing in response to financial announcements, sales numbers, etc. This concern is valid but I believe it only prevents price movement once a much larger majority of the market is passively managed.

[deleted]

Re: Hidden Dangers of the Great Index Fund Takeover

#49

Post by jcfrei » Sat, Jan 18, 2020, 8:02 PM UTC

hughpeters wrote: post #33

This is such a fascinating problem. On the one hand Jack Bogle's invention of the index fund has been so good for retail investors but because the process currently requires a middle man - i.e. one of the big three - these index funds have slowly become bloated with power. What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors? Where each investor owns their portfolio o…

There are huge economies of scale in finance as well. The time it would require you to maintain the index would most likely cost you more than the management fee on the index.

Re: Hidden Dangers of the Great Index Fund Takeover

#50

Post by biggestdecision » Sat, Jan 18, 2020, 8:05 PM UTC

Forge36 wrote: post #35

hughpeters wrote: post #33

This is such a fascinating problem. On the one hand Jack Bogle's invention of the index fund has been so good for retail investors but because the process currently requires a middle man - i.e. one of the big three - these index funds have slowly become bloated with power. What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors? Where each investor owns their portfolio o…

Having spoken with few people, the process is still mostly people, building algorithms in Excel. Much of what drives decisions is research, and personal decision's, not automation. I've heard AI trading has done very poorly as the system isn't predictable, it's people making decisions in ways which can become self fulfilling prophesies. Algorithms when distributed would also fall victim to the fastest person benefiti…

An index fund isn't doing research or making decisions though.

They invest in companies that make up an index. When a company enters the index they buy units in that company, when a company leaves the index they sell those units.