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Vanguard Is Growing Faster Than Everybody Else Combined

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Re: Vanguard Is Growing Faster Than Everybody Else Combined

#221

Post by mherdeg »

Animats wrote: post #48

With index funds so big, who determines prices? An index fund tied to the S&P 500 just buys stocks in the proportion that they're in the S&P 500. The price of the stock plays no role in that decision. At some point, this has to create problems, but so far it hasn't. It does mean the active traders, who are basically moving the same money around all day, have an outsized influence on prices. Index funds are so success…

I've been meaning to read this essay which I believe argues that with index funds so big, prices are determined by the remaining investors who think they know better than the market -- which in theory should mean that the market gets even better information than it has now and determines prices even more accurately: http://www.philosophicaleconomics.com/2016/05/passive/

I'm not 100% sure I understand the argument or have presented it correctly. It's reassuring.

The other takeaway here is that if you have a theory that ETFs are going to become increasingly popular, you could "test" that theory by investing directly in companies with run ETFs.

For example you could buy some NYSE:STT or NYST:BLK and that might help you invest in "people pay a premium for the liquidity and other benefits of ETFs". Of course, you'd want to believe that that theory will outperform the S&P 500 :)

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#222

Post by wdewind »

TheCoelacanth wrote: post #194
zip1234 wrote: post #150

Earlier quoted context omitted.

I think you have identified that this is a self-correcting problem but are selling yourself short by thinking that the economy will be destabilized. If everyone goes towards passive investments, there will be huge opportunities in active investment because the passive investing is not correctly identifying value. These opportunities are likely to cause an outflow from passive into active if that is where the money is…

And the market is so huge, that even a slight amount of mis-pricing is a huge opportunity for active investors. A systematic mis-pricing of 0.1% is worth $18 billion dollars. That means the incentive to try to exploit even a minuscule amount of mis-pricing is huge.

> A systematic mis-pricing of 0.1% is worth $18 billion dollars.

Can you expand on what exactly that means?

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#223

Post by zeroer »

hesdeadjim wrote: post #215
zeroer wrote: post #207

Earlier quoted context omitted.

I'm really talking about what happens after you've been invested with them for over a decade. Wealthfront has not yet existed for 10 years, so I know you haven't had your money invested with them for that long. The fact that tax loss harvesting can be beneficial is not in question. Once you tax loss harvest once, you lower your cost basis on the investment to less than you originally paid. You can only subsequently t…

Oh gotcha with the cost basis raising over time. I wonder what strategies you could use to mitigate that. Perhaps buying a similar asset, holding that instead of the other, wait for the original to go down, and then re-purchase. Seems fragile and risky of course...

> Perhaps buying a similar asset, holding that instead of the other, wait for the original to go down

If you're presupposing the assets are similar, this is unlikely to happen to any significant degree.

The standard way to increase your odds of being able to tax loss harvest is to own as many different uncorrelated securities as possible. You can take this to mean a fund per industry (as Betterment and Wealthfront do) or even to the extreme of only owning individual companies. That way, some are up and some are down, and you can TLH. The more slices you divide your portfolio up into, the longer you'll be able to do it. But I think realistically (especially factoring in inflation), this strategy will stop giving results before 15 years.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#224

Post by bluGill »

headmelted wrote: post #125

As a Vanguard customer, I can understand why people are so enthusiastic about their products, and have known for a while that passive investment, and Vanguard in particular, was growing while active management was on the decline. At no point did I think the difference in inflows was anywhere close to 8.5x. And it does worry me. I'm familiar with the contention that even having some active players in the market will a…

Vanguard is not as passive as you think. they don't trade often, but they do trade. Their S&P500 fund doesn't just hold stocks in the S&P500, it also holds other stocks that could have been but S&P500 had S&P not limited the index to 500 stocks. Vanguard fund managers regularly make active decisions on what stocks to buy/sell.

Vanguard is not nearly as active is most mutual funds, but they are not entirely passive either.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#225

Post by alex8022 »

lr4444lr wrote: post #176
headmelted wrote: post #166

Earlier quoted context omitted.

^^ Effectively this. My concern is that if everyone is in the passive investing boat then we're no longer following the market, we're making the market, and it's a big departure from the philosophical under-pinnings behind the idea of passive investing. (We started out letting active players make the market by placing good/bad bets and winning/losing. We got a market that was at least trying to find the right price a…

I don't understand the fear. If index funds dominate the market to the point of a near risk-free rate because that's what everyone's doing, you've effectively democratized the capital system to the benefit of the regular joe: companies still turn profits, and those become dividends. Dividends are why we buy stocks. That's what drives the whole system - not a zero-sum bilking of active investors. Yes, major growth spu…

But then, say you come a long with a new company going public... you're not large enough to be in the S&P 500, so if everyone only invests in S&P 500 index funds, no one will buy your stock. Similarly, if you're Apple (the largest company), and you have a really bad quarter, say you lose $100B, no one would sell your shares, because they're passive investors.

Obviously, these are edge cases (we'll never be 100% passive), but there is some concern that there will be a lock-in effect for companies currently in the S&P... It will be harder to grow if you're not in it, and it'll be harder to fail if you are.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#226

Post by nommm-nommm »

icelancer wrote: post #62
nabaraz wrote: post #36

Earlier quoted context omitted.

It's relatively new. They have no site, trading and research tools, investing plans etc. Most of the big brokers offer commission free trades on ETF's and mutual funds.

Can you name a few that support commission-free trades on ETFs/Mutual Funds for Roth IRA accounts? Can't find one using Google. Thanks.

Fidelity offers commission free trades on both their ETFs as well as iShares ETFs. If you're only indexing that's all you need.

They also have a crap ton of commission free mutual funds, IIRC.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#227

Post by rsync »

lmm wrote: post #116
cJ0th wrote: post #90

Earlier quoted context omitted.

> And the bigger indices grow, the larger the opportunities for active traders to profit. It's not a real problem — it's self-correcting. I appreciate that finally someone puts forward a rational argument as to why index fonds will keep working. Books and online resources tend to not take a critical look at the system at all or they offer an answer along the lines of "Trust me!" Having said that, only hindsight is 20…

You're talking as if there's a swarm of fresh money flowing into the market, whereas it's more a case of people shifting away from traditional actively managed mutual funds etc. into indexing. Money is cheap at the moment because growth is low, and that in turn means risk premia are lower and so on, but I don't think that's related to the rise of index funds. Then again I never understood why active management was so…

"Money is cheap at the moment because growth is low, and that in turn means risk premia are lower and so on"

Maybe. Money is cheap if you are a bank or a government backed borrower (like a conforming mortgage loan in the US).

If you have collateral, like the car you're borrowing against, money is kind of cheap ... also if you have a perfect credit history.

But I am not so sure that money is cheap right now out in the real world. If you are a new business with no track record or a consumer with poor credit history I think money might be quite expensive for you ...

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#229

Post by StavrosK »

dan1234 wrote: post #156
StavrosK wrote: post #91

I would very much like to invest in index funds, but Vanguard need a social security number, which I don't have. Does anyone know of an alternative that doesn't require an SSN, or something comparable to Vanguard in the EU?

I don’t know where in the EU you are but, in the UK I buy Vanguard funds (mix of LS100[0] & LS80[1]) through an S&S ISA[2] and a SIPP[3]. Pretty straight forward. The ongoing for the funds are 0.22%, the ISA platform 0.25% and the SIPP 0.3% [0] http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx... [1] http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx... [2] https://www.cavendishonline.co.uk/inves…

Thank you! Unfortunately, the UK is borderline not in the EU any more, and all these online brokerages require a NI number... I tried to use Interactive Brokers, which I heard was great for buying ETFs and index funds, but the interface was ridiculously complicated, and did not inspire trust.

Re: Vanguard Is Growing Faster Than Everybody Else Combined

#230

Post by nommm-nommm »

cylinder wrote: post #161

Well, now's the time to leave equities or go active. I've never heard of anyone getting rich by following the herd.

I've built my wealth significantly with index funds. "Get rich?" No, but that's not my goal because getting rich requires a ton more risk, usually leverage, and tons of work.
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