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

Re: Hidden Dangers of the Great Index Fund Takeover

#61

Post by christophilus » Sat, Jan 18, 2020, 9:01 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…

Sounds like M1 finanace’s pies to me. Since M1 has fractional shares, creating your own index is relatively easy even with little capital.

Re: Hidden Dangers of the Great Index Fund Takeover

#62

Post by darawk » Sat, Jan 18, 2020, 9:05 PM UTC

lowracle wrote: post #30

darawk wrote: post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

That doesn't solve the big part of the problem which is the co-ownership of competing companies. A blackrock manager voting for you or you voting doesn't change anything. Through the fund, you co-own multiple competing companies, therefore you won't vote for policies that would increase competition between those companies.

Ya you're right. I guess the correct solution then is to prevent index funds from voting entirely. If you own a company as a part of a passive vehicle, your vote doesn't count.

Re: Hidden Dangers of the Great Index Fund Takeover

#63

Post by njarboe » Sat, Jan 18, 2020, 9:39 PM UTC

lowracle wrote: post #30

darawk wrote: post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

That doesn't solve the big part of the problem which is the co-ownership of competing companies. A blackrock manager voting for you or you voting doesn't change anything. Through the fund, you co-own multiple competing companies, therefore you won't vote for policies that would increase competition between those companies.

I would say this does solve the problem. If you have enough money for your vote to matter, then you can just own all the stocks in an index yourself and get to vote. This is now even more practical as trade costs have recently been cut to zero for all major brokerages.

The average index fund owner is also not likely be spending time looking over the voting possibilities of 500 companies and aligning votes to decrease competition between them, even if that was possible. They just wouldn't vote on issues. The problem is that three funds can decided to vote on policies that reduce competition between companies and that they are big enough for the votes to matter.

Transferring votes to the underlying owners of the fund would in reality likely just cause those votes not to be cast. It is similar to just saying that the funds can't vote, but doesn't disenfranchise people who really want to vote and still gives all those shares the index funds own possible power.

Re: Hidden Dangers of the Great Index Fund Takeover

#64

Post by njarboe » Sat, Jan 18, 2020, 9:48 PM UTC

kevindong wrote: post #57

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…

> What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors? 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…

With free trades (now in everywhere) and fractional share purchases(robinhood), I think buying your own S&P500 fund would be possible with little capital ($1000?), and easy if your broker set up the software on their system to do that. I would not be surprised if robinhood already has this feature.

Re: Hidden Dangers of the Great Index Fund Takeover

#65

Post by njarboe » Sat, Jan 18, 2020, 9:51 PM UTC

jcfrei wrote: post #49

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.

Your brokerage software could make this easy. E-Trade could have a feature where you can buy/sell the S&P500, Russel2000, or total US index. You put in the total amount to invest and it does the rest.

Re: Hidden Dangers of the Great Index Fund Takeover

#66

Post by gbasin » Sat, Jan 18, 2020, 9:56 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…

It would work, except there's nothing in it for the users. So people won't adopt it.

Re: Hidden Dangers of the Great Index Fund Takeover

#67

Post by thoughtstheseus » Sat, Jan 18, 2020, 10:00 PM UTC

darawk wrote: post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

A tangent to your idea - if implemented in Japan the BOJ would be forced to vote all of its shares from ETF holdings.

Re: Hidden Dangers of the Great Index Fund Takeover

#68

Post by walshemj » Sat, Jan 18, 2020, 10:11 PM UTC

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…

That is one of the problems if you have to hold share for example Enron because you track the index you have to hold it all the way down.

For a personal example from the UK one of my actively managed investment trusts sold out of banks before most of the share price crash happened a few years ago.

Re: Hidden Dangers of the Great Index Fund Takeover

#69

Post by [deleted] » Sat, Jan 18, 2020, 10:39 PM UTC

lowracle wrote: post #30

darawk wrote: post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

That doesn't solve the big part of the problem which is the co-ownership of competing companies. A blackrock manager voting for you or you voting doesn't change anything. Through the fund, you co-own multiple competing companies, therefore you won't vote for policies that would increase competition between those companies.

[deleted]

Re: Hidden Dangers of the Great Index Fund Takeover

#70

Post by ThrustVectoring » Sat, Jan 18, 2020, 10:48 PM UTC

mandelbrotwurst wrote: post #45

encoderer wrote: post #39

Earlier quoted context omitted.

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?

M1 Finance, Interactive Brokers