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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

#81

Post by robocat »

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…

Presumably if you replicate the holdings you are lagging their buys and sells. The lag could cost more than the fees so you might as well but the fund instead of replicating...

Re: Hidden Dangers of the Great Index Fund Takeover

#82

Post by wutbrodo »

PhantomGremlin wrote: post #77
njarboe wrote: post #64

Earlier quoted context omitted.

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…

There are robo advisors who will buy the individual securities in indices for you, as long as you have enough invested with them (50k? I forget). But the only advantage over simply buying the fund AFAIK is being able to tax loss harvest from the higher volatility of individual securities. Eg, if your two-security index has stock A go down 5% and stock B go up 6%,an index fund would simoly go up 1% while the actual basket would allow harvesting the losses from stock A.

As far as I can tell, this is a fairly minor advantage, and if I wasn't using a robo-advisor, i certainly wouldn't be managing the basket directly just for this ability.

Re: Hidden Dangers of the Great Index Fund Takeover

#83

Post by wutbrodo »

wbl wrote: post #72
njarboe wrote: post #65

Earlier quoted context omitted.

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.

That's obviously not what the parent comment is talking about, since they're holding it in contrast to index funds. They're talking about directly holding the securities involved.

Roboadvisors do actually offer this if you have enough money. The only advantage AFAIK is being able to tax loss harvest the greater volatility from individual securities.

Re: Hidden Dangers of the Great Index Fund Takeover

#84

Post by wutbrodo »

riddlemethat wrote: post #16
kds3 wrote: post #11

Earlier quoted context omitted.

> do I have to sell my ownership in one of these companies? No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. Such a change can also solve problem of companies using their dominant/monopolistic position in one business area to get unfair advantage in another. > As an investor I definitely want to own companies that compete because I…

Every company today is basically a tech company or transitioning into one. Does that mean you can now own only one stock?

This is sort of meaningless use of the term, like saying every company is an electricity company or a paper company. Every company's _inputs_ are growing to include tech, but their outputs aren't: a company making tractor wheels or cans of soda is by no measure a tech company in the context of this conversation.

Re: Hidden Dangers of the Great Index Fund Takeover

#85

Post by wutbrodo »

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.

I don't think it'd be much of a concern at a larger scale either. I stopped actively investing a long time ago because it wasn't worth my time, but if the market got to the point where it was responsive to reality, the increased returns would probably draw me back in. And before me would be institutional investors, picking up ~free returns. The system is designed to be self-equilibriating in this respect

Re: Hidden Dangers of the Great Index Fund Takeover

#86

Post by dodobirdlord »

kds3 wrote: post #26
ellisv wrote: post #14

Earlier quoted context omitted.

> No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. This just isn't practical though. Apple/Google/Amazon/etc would have to be broken up for example. > That's the problem article describes! Such behavior reduces competition and hurts customers. Hedging shouldn't be illegal though. Let me buy both cows and chickens -- even though I d…

> This just isn't practical though. Apple/Google/Amazon/etc would have to be broken up for example. So happened with Standard Oil and others after antitrust laws were introduced. Was their split bad? Or impractical? Don't you as a customer want Google and other companies to be splitted to AdWords, GoogleSearch, YouTube, Android, Waymo companies?

No, it's actually pretty much the selling point that Apple the phone manufacturer is also Apple the security chip manufacturer, Apple the OS development company, Apple the financial services company, and Apple the company that supplies the wallet app. This means that I only have to trust one entity to use Apple Pay to buy things with my phone. This largely collapses if Apple can't at the same time be a manufacturer of chips, a seller of phones, a developer of operating systems, a provider of applications, and a handler of financial transactions.

Re: Hidden Dangers of the Great Index Fund Takeover

#87

Post by dodobirdlord »

kds3 wrote: post #36
ellisv wrote: post #19

Earlier quoted context omitted.

I absolutely agree. If you could only invest in one tech company, who would have invested in Apple/Amazon/Google instead of IBM? These are now large, successful companies that were able to succeed because investors were able to hedge and invest in an entire sector.

> If you could only invest in one tech company, who would have invested in Apple/Amazon/Google instead of IBM? IMHO there shouldn't be Apple/Amazon/Google/IBM companies as they are today. I want Google and other companies be splitted to AdWords, GoogleSearch, YouTube, Android, Waymo companies. And they should not use their dominant/monopolistic position in search/ads areas to get unfair advantage in other areas. So y…

Including DuckDuckGo in your list of search companies exposes one of core issues that makes this idea unworkable. DuckDuckGo is basically just a skin that shells out to Bing, Yandex, or Google.

Re: Hidden Dangers of the Great Index Fund Takeover

#88

Post by cycomanic »

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.

> 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 somewhat addressed in the article. One of the criticisms is that index founds don't do enough, resulting in more power to the CEO and less oversight. Giving voting power to individual owners would reduce engagement even further, giving even more power to the CEO. There might be some ways to improve this (let investors transfer voting power to e.g. non-profit organisation who vote for them) it's unclear if this would not simply shift the problem

Re: Hidden Dangers of the Great Index Fund Takeover

#89

Post by kqr »

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…

> I've heard AI trading has done very poorly as the system isn't predictable

So have humans, which is one reason index funds exist.

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