71–80 of 85 posts
Earlier quoted context omitted.
Show me an actively managed portfolio that consistently beats an index fund and I'll believe it. Until then, you guys can pretend to have all the inside information you want, but numbers don't lie.
How many years, and by how much?
Earlier quoted context omitted.
It's a nice, clear example of the anti-inductivity of the market: http://lesswrong.com/lw/yv/markets_are_antiinductive/ The very act of noticing that something is a good strategy, and beginning to trade on it, will over time drain away the utility of the strategy, until it is useless or worse than useless. Tracking indexes is "big", and has some brute simplicity about it, but eventually the market will eliminate that…
Show me an actively managed portfolio that consistently beats an index fund and I'll believe it. Until then, you guys can pretend to have all the inside information you want, but numbers don't lie.
I'm not suggesting "anybody can do it" but the study that concludes money managers underperform the market often gets stretched into "nothing beats index funds".
Sure some people get rich, but for buy and hold investors it's mostly a non-issue. The expense ratio of an S&P 500 index is still very small. A total market fund won't have the same front running issues and the expense ratios on those can actually be higher than the S&P 500 index funds. IOW the overhead here is in the noise IMO.
The point of the article is that owning an index fund is NOT buy-and-hold -- the indexs sell to rebalance, and do so in poorly timed ways (that is, in hige fixed batches, contrary to standard advise to "drip"), exposing investors to trading waste that the indexes are designed to avoid -- undermining the purpose of the index fund. 0.2% waste is huge compared to the overhead fee of an index fund. VTSMX fee is 0.17%. >…
Also note this is only a problem when the market is mid-term upward or flat. The chances of this type of front running backfiring are pretty high in a bear market. Also, like all forms of arbitrage, there is an upper bound on the number of shares you can do this with before you're dumping more shares on the market than the index funds need. Granted that's probably a big number, but it's not infinite.
Doing it with equities or baskets of equities gets very complicated and if you read the prospective of most ETFs pretty much all of them track the indexes within some margin of error.
Commodity ETFs on the other hand have an underlying asset that will expire or require taking delivery. Most of these ETFs are managed by a group of less than 10 people. They simply do not have the resources to take delivery of an underlying asset. They don't deal with the hassle of storing / taking delivery unless things are really out of whack. Therefore, as a the underlying futures contracts approach maturity, they need to rebalance their portfolio, almost daily, and at minimum once every couple months. In a contango market, it is very easy to front run these funds compared to ETFs that track equity indexes.
I should know, this was my primary trade 4 years ago before quantitative easing killed all volatility in the market.
That being said, the Russell 2000 index is rebalanced only once per year. Opportunities to front run that index with the futures contracts are one of those trades that I miss dearly.
Mom-and-pop investors cannot take advantage of this (and many other opportunities) because they have to feed a long chain of middlemen through prohibitively high costs of trading as well as always being on the worst side of bid-ask spreads. And then of course the value and the cost of high quality information delivered to you in a timely manner is a bit different than staring on CNBC screens.
Why can't mom-and-pop investors open an account at a place like Interactive Brokers and trade options on these events? The cost is pretty small per trade (maybe $1-2 for most stock and option trades) and the bid/ask spread isn't that bad if you are talking about an 11% move in a very liquid stock.
:)
I expected to see (1995) tagged to the end of this article. I personally know 3 people who run their own money ( Having said that, this isn't exactly easy. You need to know 1) if a stock is going into the index 2) when its going into the index 3) how much the index will buy 4) how much the index buy will affect the price of the stock the first 3 are trivial for some index funds, though most have rules that allow them…
It seems likely that someone could make some decent money shorting stocks before they leave the index funds as well.
Honestly the simplest thing to do is just monitor the big houses and whatever they do en masse do the same. Most giant purchases have to be announced and 10M shares aren't just bought on a whim.
So, the writer of this article failed to give any proof other than citing the case of one specific stock (American Airlines). Even then, it failed to give any useful comparison (sure, the stock gained 11% in 4 days, but how did the rest of the market do?) It would take a bit of effort to grab the data for all stocks entering the S&P for the last (say) 5 years, and then compare how these stocks did between the announc…
The source for the $4.3B is given later in the article: "Over a course of a year, front-running -- of stocks going into and coming out of indexes -- costs investors in S&P 500 tracker funds at least 0.2 percentage points, according to research published last year by Winton Capital Management Ltd., a quantitative hedge fund that analyzed data from 1990 to 2011. That’s equal to $4.3 billion in lost income in 2014." Tha…
This suggests to me that while it was a practical strategy, it isn't so much anymore. With index funds smearing their buys over long enough periods the effect shouldn't even be noticeable.