I think it's a great idea. I wanted to do it myself many times and didn't have time for it. I hope it will shake this industry and help bring fees down.
Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios
431–434 of 434 posts
Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios
#432Ummm, have y'all thought about spread costs? If you look at the spread of any of these ETF's mentioned (spread = ask px - bid px), you will notice that the spread is much smaller than if you were to sum up the spreads of each component stock. That's possible because of a mature ecosystem of ETF market makers and arbitrageurs (like Jane Street). If you buy all of the stocks individually, as it sounds like y'all's solu…
Also former HFT / market maker here (UBS, GETCO), and also the developer who wrote Wealthfront's direct indexing with tax loss harvesting 10 years ago. I had that same skepticism before I built it. Using a Bloomberg terminal back then, my conclusion was that the weighted spread for the S&P 500 was 3.2 bps, vs. 0.6 bps for SPY.And this was > 10 years ago, so I'd think by now it would be even tigher. The ratio may have…
Follow-up to my (most upvoted, it seems) post.
ETF expense ratios are only the headline cost. There's also a hidden cost you never see.
An index (and, therefore, any fund that tracks it) has a methodology that results in additions/deletions/index changes being announced to the market ahead of time. Usually that's quarterly, but also sometimes annually.
For an index addition announcement, you can imagine that the price will go up beforehand, since market participants (all except the actual ETF) will buy the stock in anticipation of the extra demand of that stock being in a widely held index. [This is actually more complex, and doesn't always work in that direction, but that's beyond the scope of this comment].
Now, the ETF doesn't care about this. They get graded on how closely they track the index. So they will buy the index addition on the closing auction of the day of the index reconstitution. Sure, they'll get a worse price (on average) than if they had bought 2 weeks ago, but who cares? They don't, and their clients don't (partly because they don't know).
This effect is even more pronounced in certain indexes where this dislocation would be larger, e.g. those with more turnover, infrequent rebalances, etc.
Just drop "what is the drag on returns due to index reconstitution in the Russell 1000 index?" in ChatGPT. Admittedly that's one of the worst offenders, and this is not scientific, but ChatGPT says 0.2% to 0.3% annually. That's already more than the 0.17% average mentioned in the original posting.
[Source: I worked on the trading floor in the program trading desk of a bulge bracket bank that actively traded these index reconstitutions.]
Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios
#433Earlier quoted context omitted.
Presumably a market maker would pay (PFOF) slightly more to deliver slightly worse execution (keeping the spread).
Sure that sounds plausible but it's literally not what happens in practice (see the other comment I linked that discusses research on this very thing)
Yeah, I've seen the Levine column on it.
Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios
#434In the age of internet, it's important to mention prominently which countries/jurisdictions you work with.