Hidden Dangers of the Great Index Fund Takeover

And this has already been invented. It is called hub-and-spoke, you generally see this with small CTAs and the like where there is a central portfolio with trades mirrored into separate accounts...it works but it is unnecessary, and costly. Another example of is are those awful portfolio mirroring services (eToro is one I think).

Btw, the thing that you are saying is "free" is where all the cost is. Yes, it would be great if everything was just "free" and people would do things for me for no money...but that isn't realistic. Some companies do just provide the "investment" side without all the low-level trading/account management/customer-facing stuff but it usually isn't attractive to do so for individual investors...this is basically what the big pension fund consultants do.

Marketing to individual investors is utterly hellish. It is expensive and the money you obtain is usually pretty worthless. If you are actually have investment talent, it is a terrible financial decision. You can spend hours pitching for pocket change with retail investors or you can make the same in a few seconds with an institution.

If absolute rebalancing was required in an S&P 500 index fund, there would not be enough liquidity in the market for some of the smaller of the 500.

It’s all been fine and well during a bull market, but a concern is that “index” funds have huge amounts of synthetic holdings that are untested in a rout.

It already is "open sourced". Vanguard precisely discloses what's in each of their funds already [0].

The issue with independent investors perfectly replicating the securities underlying the index funds is that the vast majority of investors simply don't have enough capital to replicate the underlying components of the fund. Meaning, the typical investment amount of a randomly chosen investor cannot buy enough shares in proportion to each other to be as diversified as a massive $100+ billion fund. That's before discussing the issues with maintaining a balanced portfolio.

> Where each investor owns their portfolio outright and adjustments to the portfolio are made automatically by a free index manager bot that runs the simple algorithm an index fund manager like Vanguard would.

If you had enough capital and trusted such a bot enough, it's not hard. But the vast majority of people will never have enough capital.

[0]: See about 40% of the way through this PDF for the securities behind Vanguard's Total Stock Market Index Fund: https://personal.vanguard.com/funds/reports/q850.pdf?2210151...

A lot of the issues that were brought up have to do with fees associated with purchasing all the stocks and the fact that you would have to buy very small fractional shares. Certainly big issues today but they don't sound like showstopper problems to me.

And to the folks criticizing my lazy use of the term "open source" - I apologize. I should know better using that phrase on hacker news!

To clarify: clearly the market weighted index process is a well known and very simple algorithm. What I meant by "open source" was a tool that can employ that market weighting process and handle all of the financial transactions necessary to execute all of the trades.