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Hidden Dangers of the Great Index Fund Takeover

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Re: Hidden Dangers of the Great Index Fund Takeover

#71

Post by nitrogen »

pochamago wrote: post #60

I think at some point we'll hit a saturation point on passively managed funds. What they're really doing is edging out the non profitable actively managed funds, and forcing managers to prove they can beat the market if they want investment. I also think we'll see more brokerages starting their own indices, which will lessen the power of any individual fund

I also think we'll see more brokerages starting their own indices, which will lessen the power of any individual fund

This seems to be happening with ETFs

Re: Hidden Dangers of the Great Index Fund Takeover

#72

Post by wbl »

njarboe wrote: post #65
jcfrei wrote: post #49

Earlier quoted context omitted.

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.

It already exists. It's called an index fund.

Re: Hidden Dangers of the Great Index Fund Takeover

#74

Post by robryan »

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.

So for a lot of shares that people can only afford fractional ownership of some kind of fund would still have to own them?

Re: Hidden Dangers of the Great Index Fund Takeover

#75

Post by [deleted] »

pilord8 wrote: post #29
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.

This is de facto already somewhat the case - most index funds lend out their shares to earn some additional income, and so they can't vote those shares. However, this becomes a bigger issue as index funds gain additional scale. As shares owned by index funds further surpasses the number of shares demanded for borrowing, index funds will be left with more shares to vote. This will likely reduce shorting costs and incr…

[deleted]

Re: Hidden Dangers of the Great Index Fund Takeover

#76

Post by anonu »

lifeisstillgood wrote: post #40
mushufasa wrote: post #28

Earlier quoted context omitted.

I built a site for people to do this www.yourstake.org

Fantastic. How do you get the fund to vote on the investors behalf ?

You don't. If you give a fund manager your money they are fiduciaries to you and the entire fund. They have to vote in a way that maximizes value for everyone.

Re: Hidden Dangers of the Great Index Fund Takeover

#77

Post by PhantomGremlin »

njarboe wrote: post #64
kevindong wrote: post #57

Earlier quoted context omitted.

> 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.

Why not just buy SPY? The expense ratio is only 0.09% and it's one security to track.

Given $1000 to invest, I can't fathom trying to individually own an average of $2 worth of each of 500 companies. And that doesn't even begin to cover it. Because the S&P 500 is market cap weighted, you would need to own $45.70 of AAPL, the top company. I don't know what the 500th stock is, but you'd probably need to own about $0.10 of it.

Even if trades themselves are "free", you still need to pay something like $0.13 per trade in SEC fees. So you are paying about a 100% commission on each of the smallest stocks you buy. And then another 100% commission when those stocks fall out of the index and you sell.

Just buy SPY. There are many good reasons that it has grown to $307 billion in net assets.

Re: Hidden Dangers of the Great Index Fund Takeover

#78

Post by kccqzy »

pochamago wrote: post #60

I think at some point we'll hit a saturation point on passively managed funds. What they're really doing is edging out the non profitable actively managed funds, and forcing managers to prove they can beat the market if they want investment. I also think we'll see more brokerages starting their own indices, which will lessen the power of any individual fund

Well think of it this way. Since index funds replicate the market exactly, then the non-index funds also on average replicate the market. It's just some funds beat the market while others underperform.

Re: Hidden Dangers of the Great Index Fund Takeover

#79

Post by fred_is_fred »

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.

I'd have to vote in thousands of different proxies, seems unwieldy.

Re: Hidden Dangers of the Great Index Fund Takeover

#80

Post by perl4ever »

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 feel like the anti-competitive concerns about index funds are another example of people having concerns about everything and its opposite and not seeing that implies the problem is misidentified.

We're all worried about companies doing things to compete that are not in the interest of society, right? Less competition equals less (fewer?) externalities. Why even have companies in the first place if competition is simply always a good thing? Why was Eddie Lampert's clashing departments at Sears (supposedly) a disaster?

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