Fidelity, the largest fund manager with $6T AUM, is taking a different direction. HN won't want to hear this but here it goes: (get your pitchforks ready)
"Fidelity Investments’ new cryptocurrency company will offer trading for institutional customers in a few weeks, Bloomberg reported Monday.
Betting that the cryptocurrency bear market will turn around, Fidelity created its cryptocurrency platform Fidelity Digital Assets in October. The new company began a custody service to securely store bitcoin for its customers in March, CNBC reported. Now, it will be letting customers buy and sell the cryptocurrency in the upcoming weeks, according to people familiar with the matter.
Fidelity, a roughly 72-year-old family controlled firm, is primarily known for managing retirement plans and mutual funds. But it also spends $2.5 billion per year on technologies like artificial intelligence and blockchain.
Forty-seven percent of institutional investors think digital assets are worth investing in, according to a survey released by Fidelity on May 2.
Further, of the 450 institutions interviewed by Fidelity for research for its new company, everyone from wealthy families to hedge funds to pensions, 22% of respondents already owned a cryptocurrency.
Since the bitcoin boom in 2017, the world’s largest cryptocurrency has dropped more than 60% since its high of almost $20,000 at the end of 2017 and was trading near $5,703 on Monday.
Fidelity is only offering the crypto trade to institutional customers. Rivals like Robinhood and E-Trade Financial are taking on retail investors."
The bit about cryptocurrency. Many in the HN community are anti-crypto and with just about as much emotional enthusiasm as an anti-vaxxer. I'm a long time member of HN, before crypto became popular. I've seen the continual rise in negative sentiment. As a veteran software engineer (cutting code since I was a kid in the 80's), there's always been a purist camp that can't quite wrap their head around the financial markets. Dotcommy crypto scams aside, some equate the financial markets with 'badness' or the dark side (wallst = bad). The adoption of crypto is inevitable and unstoppable. I spend my time developing algorithms for financial markets in C, C++ and Python and have yet to see any software engineers in this camp reject crypto. I encourage all to not to throw the baby out with the bath water. Crypto is a great trading vehicle and a great way for a new breed of company to raise capital from a new and truly global capital market.
I'd encourage those that are anit-crypto in the community to adapt. I never wanted to move from real BBSs to Compuserve, but I had to. Never moved to AOL just went straight to geocities which was a mistake but here we are.
I haven't really detected anti crypto, sentiment. Theres many (most?) people who are bearish on crypto, and I would count myself in that number. And when I say bearish I mean Bitcoin won't be worth $Xmillion and be used for some meaningful portion of trade anytime soon.
Actually, I think banks launching their own crypto currencies could be the one of the best chances they've got. I assume the banks have identified valid use cases for them. The ironic thing is they sacrifice the supposed advantage of crypto currencies, which is their decentralisation.
I've been a software engineer for over 15 years. I also got a doctorate and contributed to papers and books about Internet security back in the late '90s. I also manage quite a bit of money. I don't develop financial algorithms, though. I guess I could have at one point had I wanted to. Things like high-frequency trading make me ill, quite frankly. Such trading schemes shouldn't even be legal as there is zero value in sub-microsecond price discovery. It was purely designed to front run legitimate orders and shave pennies off of legitimate transactions. Ghoulish.
I have been watching this crypto currency situation unfold since it began. One of my early observations was that a lot of unsavory Wall Street types flocked into it for one very good reason--they understand that it was not well regulated and there was zero oversight. That allows those Wall Street types to pull off their favorite scam--the pump and dump. It is exceedingly easy to do with cryptos.
What I have also noticed about cryptos is that if you were going to scam Millenials, there is probably no better vehicle to do it with than this pseudo-technical, phony currency that perfectly plays to all their weaknesses, especially their yen to "get out of debt quick" or "get rich quick." For months the headlines were all "Blockchain! Blockchain! Blockchain!" Another sign of a scam is using technical jargon to program people--blockchain==I get rich. Just repeat it over and over and nobody even questions where that idea came from. Something from nothing--the age old scam! Just buy at "the right time" and watch the money flow in. But can millions of people really all become rich simply by buying unproven currency type vehicles? Based on my experience, no!
But this is 2019 and you're welcome to believe whatever you want. As for me, I'm avoiding this crap like the plague and I am pretty disappointed that legitimate firms like Fidelity are getting involved with something so unproven and so subject to manipulation. It's like they just can't help themselves.
This all reminds me of the dotcom era when all you had to do was buy stock in pets.com or anything.com and watch it go through the roof...for a time.
The essence of a great scam--at first, you have the dream and they have the money and in the end, it is you with the money and their dream is dead on the floor with seemingly no one to blame but their own greed. It will be same with crypto, it might just take a little longer due to the sheer magnitude of the scam.
> HN won't want to hear this but here it goes: (get your pitchforks ready)
It seems like welcome news to passive index fund investors.
Fidelity is offering zero expense ratio index funds, as well as some really low cost funds. The money to run those funds is coming from Fidelity customers who are focused on throwing their money away on other products.
> Forty-seven percent of institutional investors think digital assets are worth investing in
Yes, index funds vote. They tend to push for shareholder-friendly issues (independence of corp board, blocking poison pills, etc) and less on 'political' issues. Some research [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2475150] has shown that you can see a significant difference between companies in the index and not in the index on these issues.
Most index funds are not as active as other investors, but they tend to maintain voting shares rather than get discounted non-voting shares because the latter always end up getting screwed by the voting shares...
> Most index funds are not as active as other investors, but they tend to maintain voting shares rather than get discounted non-voting shares because the latter always end up getting screwed by the voting shares...
How? In my (Canadian) experience with dual-class shares, they’re usually the same slices of the pie and the same dividend payouts.
The usual problem is when the voting shares are impossible to actually buy, so you’re at the whims of the founding family’s ego. But then you don’t even have the choice of buying the voting. And sometimes when you could, the founders own 51%+ anyway, so you’re just buying a vote you can’t use and paying that premium to the founding family again.
Voting shares can vote on whether or not the company issues more shares, pays out accumulated profit as dividend, takes on a debt load that may look good in the short-term but will have a crippling impact on the long-term, etc. An index fund cannot just decide to dump a company's shares because management has decided to drive the company off a cliff for the sake of a quick payoff, so paying a bit extra for voting rights tends to be in their interest.
Vanguard explicitly states that it will vote in the way that maximises the benefit to the fund as a whole.
Personally I would prefer if they didn't vote at all. This would have two advantages:
* There would be no question that they were harming the world by encouraging anticompetitive behavior.
* They would save money since they wouldn't have to pay people to decide how to vote.
The second of these points should be obvious to an index fund. They don't waste money trying to beat the market in terms of picking stocks, so why waste money trying to vote better than the average active investor?
But not voting is like not investing. If you can't beat the index you don't just not invest, just like if you can't vote better than average you don't just not vote.
All you do is give others an outsized influence. Should index funds not vote on whether index funds should receive dividends or not? If you're a Turkey, you don't abstain from the Christmas vote.
> Should index funds not vote on whether index funds should receive dividends or not?
That's not the kind of question shareholders vote on. I doubt it would even be legal to pay different amounts to different shareholders within the same share class.
Well if passive investors aren't going to vote, you can bet active investors are going to suggest things that disadvantage them.
You're right, something so blatant probably isn't allowed, but offering cheap convertible bonds, which passives won't buy, convertible to preferential shares that can pay different dividends. That's plausible, as are 1000 other things.
I don't want to do a Godwin, but if you don't vote, someone else will still vote for Hitler, and genocide isn't the type of question citizens vote on.
If you know your own vote is worse than average, then by tacitly increasing the value of other voters’ votes by not voting, you are thereby increasing the influence of better quality votes than your own vote (by your own premise).
Another way to go would be to just copy the average vote, which again by the premise would have to improve the quality of your vote.
If you know you are not informed, then not voting _really is_ one of the best things you can do, in a utilitarian sense.
I'll accept that if there's a vote that doesn't affect you, and you aren't qualified in the particular area, then you may not be adding much by voting, I don't think you can extrapolate that out to not voting at all, which is what my original parent was suggesting.
I'll go further and accept the mere possibility of you being able to vote prevents the very worst outcomes.
I'm doubtful you would knowingly have a worse than average opinion though, Dunning Kruger (and the reverse) I would guess, would dominate, so if you think you're worse than average, that would make you better than average, and make you duty bound to vote to cancel out the guy who thinks he knows better.
Question.
If I created an index and tracker that tracked low carbon companies, and that tracker voted against things that would increase the carbon intensity of it's businesses, would that tracker still be passive?
I would say yes, it is still tracking an index, and its following simple rules to further the aims of that tracker, and by extension, it's investors
Knock yourself out, but as a sell side options trader I can tell you whitepoplar is right, payoffs not great if your doing it purely as a hedge. It makes more sense if you have a specific view on vols, in which case you don't really want to be buying them repeatedly, a few tenors at most, but really your prob better off just reducing your exposure. And selling otm to finance just makes things worse, it's something a bank would tell you to do to make more commissions from you
Tail hedging seems great in theory and I know that several professional investors do it (Universa, Nassim Taleb, etc), but I'm not sure how they make it work. S&P500 out-of-money puts are expensive and it just seems that years or decades of put losses leading up to the "big event" could run you dry.
There’s no difference, in aggregate, between retail investors investing in an index fund vs a million investors throwing a million darts at a million newspaper stock pages.
(Ignoring weighting/market cap, but the point is that a lot of investing was passive anyway)
One experiences a lot less variability, bookkeeping and trading fees though.
> the point is that a lot of investing was passive anyway
The discussion is about the part that was not passive. It’s about passive funds replacing active fund managers, not about passive funds replacing dart-throwing retail monkeys.
HFT isn't relevant in this context, you need a better example of an active fund that you think reliably makes money by holding, or at least making big trades over longer time periods. HFTs don't normally move the market, they're effectively just frontrunning, you're thinking of something like CTAs/long-short quants
High frequency trading is not frontrunning. Neither the standard legal definition of frontrunning nor its conceptual underpinnings are applicable to high frequency trading.
It's also common for market makers to move the market.
HFTs make their money on the difference between the bid and ask prices.
They can only exist because you're willing to sell at 10c, and I'm willing to buy at 11c. Hypothetically we could have traded directly lets say at 10.5c. So the HFTer has literally moved the market.
Buying at a higher price would tend to a higher price anchor. If I paid 11c, I wouldn't want to sell at a loss, so your 10.9c offer would be rejected, where it might have been accepted if I'd paid 10.5c.
But then ultra rational me would never buy above 12c and ultra rational you would never sell below 9c, based on current info, so irrespective of middlemen, the price would be bounded by those 2 figures.
And there isn't net buying or selling pressure so you could treat the spread as a fee in return for providing liquidity.
But yeah in practice, I think you're basically correct.
much HFT is market-making, they are labels on different axes. HFT is about system latencies and holding times. Market making is about an approach to trading.
@otalp is likely talking about the distortion created by having a large % of overall investment made based on components of market index instead of hard data (e.g. financial statement of X company show below expected return, I will decrease investment). In other words, mass indexation can create market distortions depending on how they are structured.
Which could be considered « active » since they have to look at the top 500, and add/remove as required in a manner that won’t cause a company dropping from 500 to 501 from becoming 600 because of a sell off.
But that just goes to the point I’m making: there are varying degrees of active and passive funds. The rise of passive index funds won’t distort much of anything when funds were coming from a passive fund that tried to sell itself (and charge) as active.
There is a difference if individual investors largely don't bother to use their shareholder votes (meaning neutral influence) while index fund managers vote to collude (since it is worth their time to bother to vote carefully). Probably not a big difference, but hard to be sure.
I want to know how « active » the actively managed funds are.
If the fund is actively looking for deep value bets and trying to drum up increased value for stockholders, then it’s truly active.
But if they’re just creating a « high-income fund » and just throwing together a basket of high dividend stocks, or a real estate fund and putting together a basket of REITs, they’re effectively passive funds and have little impact on the market vs. true index funds. On average, switching between these doesn’t distort the market.
One must also consider that people are using passive index funds as a tool to make active bets.
E.g. if you are buying some US pharmaceutical index fund you are buying a passive product but are actually making two very active bets: you asume that pharmaceutical industry will outperform other sectors and that US pharmaceutical firms will do better than the rest of the world.
Exactly. People talk about about "index funds" as if there is only one index, when in fact there are dozens or even hundreds of indexes. Picking which indexes to invest in is very much a active choice that can have massive effects on your returns.
You are still making a number of small bets unknowingly.
A "entire stock market index fund" (which one?) has a methodology for weighting the funds and the markets it invests in. Most funds today weigh their selection by market capitalization. A other weigthing method, such as considering country GDP, might deliver superior results.
Also such "entire stock market index funds" usually only include large cap stocks -- small or micro cap stocks may or may not deliver better results.
Also such "entire stock market index funds" often will exclude entire countries. E.g. the very popular MSCI World and MSCI Emerging Markets funds contain 0 stocks from Ukraine but last year Ukraine had the best performing stock market worldwide.
I’ve made the decision to not bother with international diversification beyond US and local (Canadian) indicies.
Why?
Non-US countries usually don’t have diverse stock indexes. You’ll have their big telecoms, their big banks and a few other industries. A lot of their big industries will be owned by multinationals anyway, and the smaller ones are private.
The US large caps provide tons of international diversification, with a lot less paperwork and withholding taxes.
Google, Apple, Facebook, McDo’s, any oil company, etc. have large amounts of foreign revenue/branches, even in countries without a stock market that you could buy on.
If anything, US investors have too much international diversification when they buy US large cap indicies.
If the US economy does well but the rest doesn’t, US stock market returns will be poor.
Strongly disagreed on that. Not everything is about outperforming the rest of the world.
Could be betting that the US pharmaceutical won't go the same way at the same time than the US tech sector, where you have other investments. Could be that's it's one of the only 10 funds you have access to.
>Strongly disagreed on that. Not everything is about outperforming the rest of the world.
Indeed. Come over to /r/leanfire or even /r/financialindependence, most of us just want to have stable 'average' returns via funds like VTSAX so that we might retire as soon as possible without betting the farm.
If the allocation of assets to index funds approach 100%, wouldnt that distort the prices of stocks? Instead of the price reflecting the fundamentals of the business and earnings, it would simply reflect how the index is moving. A bad company with a dying business would not decline in price because money was flowing in its index.
And active managers would not short dying businesses if they realize everyone else was blindly plowing money to it because it belonged to an index. Thus worsening the situation. The price of a stock is no longer “efficient” and not a reflection of the information available to the entire market.
Personally I wish index funds were abolished, forcing everyone to pick and choose the companies they think will flourish or fail.
As the proportion increases, the market distortion you describe would increase, making it easier to pick stocks successfully. So the answer is: there will be an equilibrium and we have just not reached it.
But how to know when that equilibrium is reached? Even retrospectively how might someone spot temporary glitches where things have gone too far from looking at market prices?
Potentially similar situation as the number of publicly traded companies continues to fall. Fewer companies available to invest in may inflate the price of those left.
Which should just encourage companies to go public. Or encourage public companies to acquire more private ones. Or to float more stock instead of going to the bond markets.
But big pension funds are also putting money into direct acquisitions instead of just buying stocks.
The price drops to zero if the business dies because the stock gives you no voting power or dividends. Because the company is dead.
So, if it's a dying business everyone is pouring their money into then every active manager would search the couch for every last penny to short it with. Which is why I don't believe index funds will make up 100% of all stock assets because people who do understand the market would exploit the index fund allocation and attract more capital, and the stock picks of those successful active managers would quickly be represented in the index.
If someone wants to diversify their portfolio, then they can go ahead and choose the companies they want to diversify with. Want to mix in some tech companies into your portfolio. OK, go pick Amazon vs. Oracle. Want to mix in a retail company? OK, go pick Lululemon vs Bed Bath and Beyond.
Unless you mean you want to make it illegal to buy stocks in more than 5 companies I don't see how this would be in any way enforceable. I would just Google "vanguard stock allocation fund X" and buy exactly those.
I have 0 clue about the financials and business plans of any of those companies so why do you want to force me to use my time to hand pick stocks?
I mean, in some sense anti-trust laws do this. But you're right it would be impossible/dysfunctional at the level of retail investors.
More plausible is some sort of rule preventing a single index fund from taking large positions in multiple firms the same industry; retail investors could then invest in multiple index funds, achieving the same diversification but with increased difficulty of collusion. Unclear whether that would be worth the higher costs, though, and inevitable ambiguity about what constitutes an industry.
I don’t see how it’s any better for the market for investments to be dominated by retail investors who have neither the time nor the information they’d need to make informed choices about how to invest their retirement funds.
My grandmother used to buy shares in Disney and GE because they were household names - which had little to do with their underlying financial health.
Maybe. J Random Schmoe may do better because they’re investing their own money. The money manager managing JRS’ money on their behalf may make choices that help our MMM’s best friend more than anything else. Great for MM, but terrible for JRS.
There are plenty of studies that make it clear just how good J Random Schmoe's odds are of succeeding. (They're terrible.) we should not be talking about this as if the question is still open. The time before index funds was great for bankers, for money managers, and for brokers. It was terrible for the public.
Back in the day I invested some money when AAPL was at $100 and when RIMM was at $100. I was only half-right in my assessments.
Given that last time I did an IQ test I was on the right-hand side of the proverbial Bell curve, I'm not sure how well anyone that is below average (IQ 100) would fair.
I've since learned my lesson and stuck with index funds (dividends being re-invested), and gotten market returns that have been quite nice. At some point markets will tank, and I will rebalance by liquidating some bonds and picking up some more equities (selling high, buying low).
And yet @AznHisoka thinks I should not be allowed to easily get market returns by investing in index funds. (Which the Oracle of Omaha himself, Warren Buffet, suggests that most people do.)
Index funds are great for individuals. And I recommend most people stick with them.
But if the purpose of the stock market is to allocate the right amount of capital to companies based on their fundamentals and earnings, index funds don’t help.
An important nuance is that active fund managers are not incentivized to beat the index, they are incentivized to grow assets under management which is only weakly correlated.
The importance of this distinction becomes obvious when you compare the performance of public active funds, which are managing other peoples' money for a fee, and prop funds, which are only managing their own money and therefore can't profit on fee structures.
There is an equilibrium point between indexed and non-indexed portfolios in terms of optimizing expected returns. Capital will move to whatever portfolio type is giving the best returns if too much of the market is composed of one or the other. More money moving into indexing makes it easier to outperform the index because there are fewer investors competing to profit from mis-priced equities, making those positions cheaper to acquire. Anecdotally, I find it easier to outperform the indexes today than it was fifteen years ago.
Even if the entire market is indexing, there are still fundamental mechanisms that will keep it responsive. Markets are indexed in many ways depending on what aspect of the market the indexes are trying to capture, and these different indexes weight and value the underlying stocks differently, with some indexes outperforming others which will drive allocation of capital to different indexes. And at the extremes, over-valuation is addressed by bankruptcy and under-valuation is addressed by taking a company private, removing companies from the market entirely.
Theres enough people actively trading that the market is relatively efficient. You are correct that if index funds reached 100% it would be crazy, but index funds would start performing worse than the market when they got to 99%, which means more would go to actively managed, til 98%, etc etc.
There is definitely going to be a balance point where active > passive. And we might know about it 5, 10 years from now, even if it already happened.
The closer the allocation gets to 100%, the easier it will be for actively managed funds to beat their returns. So it is essentially a self-correcting problem.
Will it though? The index fund owns stocks in the same proportions as the active funds do in combination, so the active funds can't beat the index funds no matter how inefficient the market gets.
Maybe index funds should not be allowed in the first place? It's extreme navel-gazing at best. Does that have anything to do with the purpose of public markets (to fund the economy)?
While no one knows how this will play out, I'm very curious what are experts in various economic camps saying about it, what predictions and warnings are being issued and what logic they are basing that on?
NO ONE knew the answers to those same questions about active investment either, though. Markets are markets, and behave in crazy unstable pro-cyclic ways because of psychology, not abstract theory.
Here's an obvious hypothesis: Nothing's going to change at all. The fraction of holdings in these index funds is high, but matches the fraction that was always just thrown into the "balanced random junk" segments of portfolios. Players who want to make focused bets on particular securities or industries will continue to do so, in exactly the same proportion they did before.
I mean, NO ONE knows if that is true or not, but I'd put money down on it.
It's possible. I did not make any claims to the contrary.
That said, in the event of market stress, it seems that more individual portfolios will be more highly correlated with each other than in the past.
Isn't that a significant change? In light of it, are you willing to bet that aggregate investor behavior in a future period of stress will be similar to what we have seen in the past?
> The fraction of holdings in these index funds is high, but matches the fraction that was always just thrown into the "balanced random junk" segments of portfolios. Players who want to make focused bets on particular securities or industries will continue to do so, in exactly the same proportion they did before.
30 years ago investing in Index style mutual funds was pretty uncommon. 50 years ago Index funds didn't even exist, and you'd have to have significant wealth to own hundreds or thousands of individual stocks (especially anywhere close to market weighted). We are seeing a fundamental shift in how people invest, though whether or not that leads to a fundamentally different outcome is unknown.
i am not too concerned. market crashes such has the 1929 crash predate passive funds by half a century.
The market will gravitate to its fair value based on fundamentals and other factors. Most of these passive funds just mirror an underlying benchmark but do not control it.
Most trading is done by futures, etfs, and the individual stocks that compose the index. It's sorta like a tug of war between all of these participants to reach an equilibrium and eliminate arbitrage.
Atlantic article from 2017 [1] mentioned that every company having the same set of investors might reduce competition on the market:
"Julio Rotemberg, then a newly minted economist from Princeton, posited that “firms, acting in the interest of their shareholders,” might “tend to act collusively when their shareholders have diversified portfolios.” The idea, which Rotemberg explored in a working paper, was that if investors own a slice of every firm, they will make more money if firms compete less and collectively raise prices, at the expense of consumers"
The article does point out that there are also other opinions on the subject.
doesn't that already happen? It seems like many firms converge on a single price for a service or product, such has domain names, soda, candy, or web hosting or credit card fees, give or take 10 percent or so.
In theory, yes. If you had a good estimate of marginal economic costs then it would be easier to conclude if there is collusion. In practice, it is very difficult to estimate economic costs. This, for example, would include estimating the opportunity cost of each company's investment.
One charge levelled at active management is that they're closet trackers so they own at least most of the constituents of an index. And the big insurance companies and pension funds are probably going to have their funds spread out over competing companies.
Yep this is how the VC Ponzi scheme works. Take a business that can absorb enormous amounts of capital by selling a dollar for 75c, bloat it to the moon, then offload onto the index funds. Repeat.
The most popular size based S&P indices (e.g. S&P 500) have more complicated criteria than just market cap. New constituents must trade more than its market cap every year, must have traded publicly for at least 12 months, and the four most recent quarters must be profitable. There are other criteria as well.
I'm a fan of index funds but part of me can't help but wonder if this development will result in actively-managed funds and wealthy individual investors having outsized influence on market direction?
It does give them more profit to take if they had a better idea of the « true » value of a stock, since everybody else has given up on paying people for that methodology.
Changes in stock price are measured by the prices that trades happen at, and passively managed funds are much less likely to do trades (Per dollar invested).
I love the assertion that a stock reflects some sort of real value. They don’t, the market is an irrational pile of crap, and that’s why index funds are the best. They take the cream of the crap.
I like to think they get all the value of active investing without having to pay for it.
Kinda like if I beat the price of your life insurance policy by 1 cent. I’ve effectively externalise the actuarial and marketing costs to somebody else.
I learned this lesson, but I wish I had learned it sooner.
A few decades ago I started dollar-cost averaging into a hot-rod actively managed fund. As always seems to happen, the fund cooled down and I was late to catch on. My money was not effectively put to use.
Then I started reading (and YouTube watching) people like Malkiel, Buffet, Bogle, Dalio, etc. They all clearly explain the benefits of index funds for the vast majority of people. I believe them.
Indexing is the way to go. Read Bogleheads.org for great advice on this and other topics.
All this does is make all stocks move up or down regardless of their individual performance to some extent.
If there is a big swing in either direction. Some stocks will get way overvalued or undervalued compared to their intrinsic value. Maybe this is beneficial to a value investor that picks stocks instead of investing in ETF's? I wonder if ETFS will make the market drop a lot in the next crash and will the etf's even track their underlying accurately? Lot's of arbitrage opportunities.
Not as many as you would think. The market has a tendency to only price in risks that are easy to derive from market and industry data, which excludes many material risks and even then is only approximate. As more of the market engages in risk-oblivious portfolio selection e.g. indexing, both the number and size of available arbitrage opportunities has been growing in practice.
I've built my portfolios exclusively on mis-/un-priced risk for a very long time, which has always performed well, but in my experience it is easier to find these opportunities today than it was many years ago, likely due to a combination of factors.
There are also cultural and social elements. The pendulum has swung so far toward indexing being the "correct" way to invest that there is a bizarre amount of hostility out in the world toward people who assert it is possible to have consistently great performance without index investing.
> a bizarre amount of hostility out in the world toward people who assert it is possible to have consistently great performance without index investing.
I think the hostility comes from the fact that such individuals almost always make the assertion sans evidence, and often stand to make money from suckers -- in the gambling sense, i.e. people who don't know the odds -- who believe them and trust them with money. I'm sure if someone demonstrated their ability to outperform the market prospectively, and also were willing to accept outside investment, they would have people knocking down their door to get in. However, there is no entity with a long track record of outperforming the market that is both open to outside investors and claims that they will continue to outperform with a high degree of certainty.
Aside: the people want to know 1. how long you have been investing 2. the rough amount of assets you have invested 3. what your annualized rate of return is over the period mentioned in question 1. Not that this would prove anything, because anyone can claim to have had 25% ARoR over the last forty years, but it would at least be interesting to know what the claimed performance is.
I managed to get something like a 400% return over 2 years by buying amazon and nvidia right before the crypto bubble took off. Made more than most of my friends who bought bitcoin did (sell gold in a gold rush)
People improperly conflate public active funds, which are not incentivized to outperform, with all portfolios. Funds that consistently outperform for a very long time almost universally end up closed or are prop trading shops, the latter which would have no reason to exist if they didn't outperform. All of these have practical scaling limits but it isn't inordinately difficult. Only comparing indexes to public active funds is a bit of a straw man because it actively selects for under-performers.
I'm a long-term risk modeler, originally for fun and later for profit. I build portfolios of US large caps based on categories of risk that are not priced into the market because they are difficult to model in a conventional way. This is an entirely uncontroversial way to outperform indexes but you wouldn't build a public investment vehicle around it. My oldest continuous portfolio goes back to the turn of the century, at around 20-21% ARR (more recent portfolios are a bit better). Per year, it requires maybe several hours of my time. I have a few friends and acquaintances that seem to do a bit better (but also spend more time on it) that also trade on un-/mis-priced risk, often as a justification to polish their data science skills, across a variety of asset classes.
I am not saying it is trivial to consistently outperform the indexes, just that the difficulty is significantly overstated. The hurdle most people trip over is that there are no shortcuts to figuring out how to build your own models from first principles and how to trade them.
>I am not saying it is trivial to consistently outperform the indexes, just that the difficulty is significantly overstated.
The difficulty isn't overstated because in aggregate it's mathematically impossible. The total market return is zero-sum so someone else has to take the other side of your bets and lose return. That someone else is not me, I'm getting the market average consistently to within a decimal point from my index fund. Here's Sharpe's simple take on it:
> This need not be taken as a counsel of despair. It is perfectly possible for some active managers to beat their passive brethren, even after costs. Such managers must, of course, manage a minority share of the actively managed dollars within the market in question. It is also possible for an investor (such as a pension fund) to choose a set of active managers that, collectively, provides a total return better than that of a passive alternative, even after costs. Not all the managers in the set have to beat their passive counterparts, only those managing a majority of the investor's actively managed funds.
For anyone who misreads the subtleties of your post and thinks they cant make consistent alpha through active management. They can, but (without knowing anything about them) probably won't.
Oh, it's definitely possible to outperform. And for every bit of that performance someone else is taking the losing side of that bet. What most people must realize is that as retail investors with no special insight into the market the chance that someone is giving them a chance to be on the winning side of the bets is not great. If you can't identify who the sucker is, it's probably you, so taking the average at low fees is your best bet.
Assuming no entries or exits into a cap weighted index, there will be no trades. No trades mean no price pressure either way. So it would just be the active traders exerting price pressure. And index buyers and sellers would buy and sell everything which wouldn't misvalue any one stock.
I mean if everyone piled into the market, you would still get a bubble sure, but that would imply that at least some stocks were misvalued anyway, so we still aren't worse off.
'Intrinsic' value starts getting tricky very quickly. How do you go about defining it. You're implying it isn't the stock price, so assets minus liabilities? But then what about Uber, or Tesla.
What arbitrage opportunities are you making reference to? ETFs are basically valued via arbitrage, certain traders are allowed to swap the ETF for the basket of shares, or visa versa, so if the price moves away from the underlying shares, they arbitrage it away.
I am referring to etf price during extreme volatility. The price can diverge a lot from its NAV.
If the market is crashing then the bid ask spread is going to be very wide but i guess same will be true for common stocks. I think it is important to invest in high volume etf's like qqq/spy. So yeah you are right, arbitrage opportunities are still there i just think that during downtrends there will be more but in that case who cares about arbitrage! The best strategy is to go short.
Has this ever been observed to be the case? We have had moments of extreme or at least high volatility in the recent past and I don't recall any news articles about how VTI diverged from VTSAX. That being said, even if such a thing did happen, that would only affect people who trade the ETF during those moments of volatility, right? For anyone else, the only risk is that people would be so scared off of the ETF that there would be insufficient liquidity to restore the price to the right point. Even then, an authorized participant will eventually buy up the under-priced shares and redeem them.
I was talking about Value investing. Do you see value in buying uber and tesla at the moment? The best value is the obvious one. Do not buy these stocks or go short at least till they are more attractively priced and there story changes. The risk/reward does not look attractive in these stocks but people still keeping buying them!
Ok. I don't think a value investor would see generally more or less opportunities than now. If the index/market is over bought then there will be less opportunities, and in a selloff, more opportunities.
It's worth pointing out that vanguard at least do a Value tracker. I suppose theres discussion to be had over whether it's 'passive' but I guess it's included in these figures.
Short selling tends to be a losers game, stocks go up more than they go down, so I wouldn't recommend that, but yes they aren't value stocks. but then my moneys in index funds, so what do I know.
ETFs were an outstanding idea but never meant to be used on such an excessive scale. If once stock falls and many of the ETFs have to re-balance their index to reflect this, this creates a feed back effect. And if Index ETFs and HFT are the last ones trading this stock, good luck with this.
Cap-weighted index funds do not have to rebalance when a stock falls (this is the most common type as I understand it). Consider a cap-weighted index where there are only two stocks, A and B. At time 0 the have an equal market cap of $1B each. The underlying mutual fund has $20M of AUM, so they hold $10M of A and $10M of B.
State of the world
------------------
Market caps A=$1B B=$1B
Fund holdings A=$10M B=$10M
Now at time 1 some bad news about B is made public. B's price falls by 50%.
Market caps A=$1B B=$0.5B
Fund holdings A=$10M B=$5M
As you can see, the market cap weighted target for B dropped from 50% to 33%. But the fund's holdings of B also dropped from 50% to 33%. No rebalancing is required because the asset price changed at the same time as the market cap weighted fraction changed.
The only time a fund needs to rebalance is when a security is removed from or added to the underlying index. I don't know how that is handled, but I suspect it is predictable and priced in.
Authorized participants [1] will buy the undervalued shares and redeem them for shares in the underlying fund for a profit. FWIW, there is no such thing as "rebalancing" an ETF. The underlying fund can rebalance, but the ETF is an exchange-traded representation of the underlying fund. There's nothing in it to rebalance.
This also means one more thing: Institutional investors and smart money is selling into this rising market. Retail investors are going to be left holding the bag.
The headline should be: Institutional and professional investors are going into cash resulting in individual investors that buy ETF's share to go up to 50 percent.
When professional will start shorting and going the other direction. Headline will be: 80 percent of falling US assets are now invested in index funds.
If you are never going to sell your ETF/stocks then yeah it doesn't matter. I read online once that a mutual fund tried to see which of there customers made the most money.
The customers that made the most were the ones who had forgotten they made that investment and the others who were dead.
> If you are never going to sell your ETF/stocks then yeah it doesn't matter.
Most people are not investing for 'fun', but rather for retirement. So "never" selling, or at least not-selling for several decades, is actually a reasonable assumption.
The main problem is that the general public read headlines and see "Markets Are Crashing!!1!" and pull out. Whereas if they could keep their cool a bit, and stay invested (and ideally keeping investing (monthly?) on the way down), they'll generally end up okay when they approach retirement.
Or more likely, retail investors are pulling their money out of managed funds and putting it into ETFS. When pulling their money out of the managed fund, the managed fund will then have to sell some assets to maintain their portfolio ratios which is then bought up by the ETFS said retail investors are moving too.
It'd be nice if it were easy to buy a Vanguard ETF but modified to either avoid specific companies or set to create incentives for certain types of companies. Like a company could get an outsized weight if it has a more diverse executive team or compensated them less than %N00 of the average worker. Just to give passive investors some sort of tool to nudge companies into better behavior (as defined by their aggregate preferences).
"Closed" like all their investor funds which were replaced by the cheaper admiral funds. You wouldn't say vtsmx is closed, it's just replaced by vtsax. Same deal here.
It's not actually closed. Just buy the admiral version instead, same thing but cheaper.
It's interesting that this is an actively managed fund. There are actually a few indices for this kind of thing but apparently Vanguard is not using them: https://www.msci.com/esg-indexes
I've thought the same, specifically for green energy. The "logical" way would be to allocate some money to one of the green mutual funds -- but those are typical pretty high ER. And I'm not sure be desire to try to be green-ish overcomes that. A customizable ETF/mutual fund would awesome. But I wonder what the hurdles are technically/legally...
I'm not the user you are responding to, but the general view of people who make this comment is that it discriminates against people are who are well-represented on the boards of financial and technology firms.
Which is true, because all forms of hiring are discrimination. Business discriminate against people who don't have the qualifications that they believe will positively impact their business.
If the user you responded to has reason to believe that a certain company has hired certain individuals who are not qualified to do the job they were hired for, I encourage her to say that. But it's not enough to say the practice is blanket good or bad. There are just too many variables to account for.
I believe the discrimination that thatoneuser is objecting to is discrimination based on things that someone has no control over such as gender and skin color. This is typically whats used as the basis when people say they want to increase diversity. I would guess that thatoneuser does not have an issue with discrimination and diversity based on what someone can change such as their education and experience.
Qualifications are fine. That's merit based hiring. Saying you don't have the right genitals or your skin isn't the right color and thus you don't deserve the job is wrong. Assuming that's what op meant by adversity as I rarely hear adversity referring to learned skills.
Because it's promoting hiring practices that rely on using gender/race/whatever to decide who deserves a position. Diversity (of intrinsic characteristic) has no intrinsic value, it's an ideology and an unethical one at that.
I quit my job a couple weeks ago to start a company that does exactly this. If anyone is interested in learning more, feel free to reach out at [hn-username]@greengovernance.org.
Not an index fund but Motif let's you buy a basket of securities with different "themes". I have always thought investing in companies based on the ratio of worker salaries to C level salaries would be very interesting.
I'm a noob in investing so I have a few questions:
* Is this a bad news?
* Are there index funds that blindly follow the top 500 but actively remove dumb stocks?
* Should I avoid American-only index fund? Looks like the Chinese market is becoming pretty strong and there doesn't seem to be any insurance that the American market will stay as strong in the next 20+ years. I would comfortable betting on the world market, but not really on one country's market.
* I have some money saved up that I don't know what to do with. I'll probably look into investing for an apartment in the next 2-5 years. Should I let it sit in my bank account or should I put everything in an index fund?
It's probably not bad news since there are still plenty of active traders. It's just a milestone.
Nobody can predict the future and you shouldn't get your investment advice from Hacker News, but putting everything into one investment tends to be a bad idea.
2. Any level of active management would make an index fund not an index fund. You'd be going to trying to pick the best-performing stocks, which is not what an index fund tries to do (capture the overall movements of the market).
3. The general advice is to have approximately a 65/25/10 split between SP500/international/extended market funds. You can adjust as desired.
4. Stock index funds are great for long-term investments, not so much for shorter ones. You can look at bond funds as well. If you have a good amount already (>100k maybe) you can schedule a free discussion with an advisor at places like Fidelity/Vanguard/CS and have them run you through the basics.
There are index funds that track the S&P 500. But who would decide what a "dumb" stock is? I don't even know where to start with this concept. I would not worry about this if you are an investing noob.
You should not avoid an American-only index fund. The U.S. equity market is by far the largest in the world, so a broad index of American stocks will cover a lot of diversity. That said, there are plenty of international stock funds available as well.
I would at least look at CDs (certificates of deposit) or short term bonds, which will give you better returns than sitting in a bank account. Stocks will have a better chance for an even better return... but also a chance that the market will be down when you want to get that apartment. That's a fundamental concept for investing: higher returns come with higher risk (and vice versa).
1. Bad news for who? It's certainly an interesting development - as a higher proportion of invested assets move predictably (i.e. are passively invested), the game becomes easier for the fewer remaining active participants.
2. What is a dumb stock?
3. I don't have the answer to this but keep in mind that those with a vested interest in the success of local markets (e.g. financial advisors within a given nation) are likely to suggest that people invest more in those areas.
Your inclination to consider likely geopolitical shifts as you make these decisions is a good one.
I'm surprised lot of people here think this is not bad news. It most certainly is. Think about it: Index funds don't make any moves by themselves, they simply follow the aggregate decision of active investors that are still in market. This is all good when they have < 50% share but above that now there is more asset that follows smaller assets.
Consider the extreme example: Let's say 99.999999% of assets are in index funds and now there are basically only 10 people left in market who are doing active investing. So when these 10 people decides to sell stock of some company, that stock will fall by some minor amount but immediately all index funds would need to react to this minor drop and sell their holdings. But that would cause more market drop and price would take a death spiral route. This basically means that those 10 people now left to do active investment can now control the market. Any of their small movements gets amplified by large gorillas of index funds.
Above is just tip of the iceburg. The secret of the success of index funds has been very simple: They aggregate all the active investors and these average turns out to be better than individual. However when number of active investors reduces, the variance would increase and this means index funds would become less and less optimal over time.
I see, indeed IIUC index funds can stagnate and do not provide movement (up or down) on the market. So they are basically neutral when it comes to influencing trends. On the other hand, if the lack of active actors on the market means that the market is only going down, it would be inconsistent.
> So when these 10 people decides to sell stock of some company, that stock will fall by some minor amount but immediately all index funds would need to react to this minor drop and sell their holdings.
That's not how it would work.
1) When one of the 10 sells they must be selling to another of the 10 who is buying. There's no such thing as just selling. Instead the way that the price would drop would be that the 10 start trading that stock between themselves at a lower price than it had been before.
2) If the price dropped then that wouldn't mean that the index fund had to sell. The index fund aims to own a fixed proportion of each company. If they own $98 million of a $100 million company and then the share price drops in half then they now own $49 million of a $50 million company. There's no need for them to do anything.
1) few parties can collude to sell or buy at the price they desire.
2) Index fund must balance their portfolio. If stock A goes down and B goes up then they must sell off A and buy more of B to re-balance. At least that has been my understanding.
Above two in combination means that you can cause chain reaction which is to be expected because much larger dollars is simply trying to imitate much smaller dollars. So later gets to control the former.
They must balance to the underlying index, not so that they hold the same value of each stock. If A goes down and B goes up they don't have to do anything unless the change is so dramatic that it causes the people who compile the index to update which stocks are in the index.
What can happen is that a stock being added/removed from a major index can cause a large amount of buying/selling by index funds as they are 'forced' to add or remove that stock in their portfolio. However that is a fairly rare occurrence.
Let's try an example. Suppose company A has 1000000 shares in total, each with market value of $100. Then its market cap is $100 million. Suppose company B has 2000000 shares total, each with market value of $150. Then its market cap is $300 million.
Index funds own shares in proportion to the market cap. So an index fund will own shares of B worth three times as much as their shares in A. Lets say we're looking at a fund that owns $6 million of B and $2 million of A.
Now suppose A's share price doubles to $200 and B's share price falls to $125. Then the value of the index funds shares will now be $2 million × ($200/$100) = $4 million of A, and $6 million × ($125/$150) = $5 million of B. Meanwhile A's market cap has changed to 1000000 × $200 = $200 million, and B's market cap has changed to 2000000 × $125 = $250 million.
Then B's market cap is 1.25 of A's market cap, so the index fund wants to be holding shares in B worth 1.25 the value of its shares in A. It currently has $4 million of A, so it wants to be holding 1.25 × $4 million = $5 million of B, which in fact is the amount that it is already holding.
I imagine the worry that "everything will be an index fund" a bit like discussing a Savannah ecology and worrying that "everything will evolve into grazing herbivores."
Clearly there are equilibrium effects here which would stop the extreme scenario you describe from arising.
As the proportion of active investors in the market falls, those that remain enjoy a greater advantage. There will therefore always be some minimum threshold of actively managed assets (due to the marginal returns from active management eventually exceeding the marginal fees).
It's an open question as to what this threshold might be, but it will certainly be orders of magnitude above what you describe.
Seems like it's more complicated than that? Index funds do buy and sell sometimes, as some investors move money into and out of index funds. There are also dividends and stock buybacks.
Nobody really was/is freaking out over broad equity active mutual funds that hold assets with a very high correlation to the index. ETFs offer intraday arbitrage opportunities during market panics (up or down), unlike mutual funds.
Is it possible for too much money to be in funds that automatically allocate based on company value? Imagine if 90% was in index funds like the S&P - would that distort the accuracy of the market?
The limiting factor is leverage. If a hedge fund (or equivalent) had enough data and confidence in a company, they would borrow money to increase their position size. This would make it possibly to affect price for non passive investors.
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[ 2.6 ms ] story [ 251 ms ] thread"Fidelity Investments’ new cryptocurrency company will offer trading for institutional customers in a few weeks, Bloomberg reported Monday.
Betting that the cryptocurrency bear market will turn around, Fidelity created its cryptocurrency platform Fidelity Digital Assets in October. The new company began a custody service to securely store bitcoin for its customers in March, CNBC reported. Now, it will be letting customers buy and sell the cryptocurrency in the upcoming weeks, according to people familiar with the matter.
Fidelity, a roughly 72-year-old family controlled firm, is primarily known for managing retirement plans and mutual funds. But it also spends $2.5 billion per year on technologies like artificial intelligence and blockchain.
Forty-seven percent of institutional investors think digital assets are worth investing in, according to a survey released by Fidelity on May 2.
Further, of the 450 institutions interviewed by Fidelity for research for its new company, everyone from wealthy families to hedge funds to pensions, 22% of respondents already owned a cryptocurrency.
Since the bitcoin boom in 2017, the world’s largest cryptocurrency has dropped more than 60% since its high of almost $20,000 at the end of 2017 and was trading near $5,703 on Monday.
Fidelity is only offering the crypto trade to institutional customers. Rivals like Robinhood and E-Trade Financial are taking on retail investors."
https://www.cnbc.com/2019/05/06/fidelity-is-reportedly-about...
JP Morgan are launching a crypto currency also btw.
https://www.theblockcrypto.com/2019/02/14/jp-morgan-launches...
I'd encourage those that are anit-crypto in the community to adapt. I never wanted to move from real BBSs to Compuserve, but I had to. Never moved to AOL just went straight to geocities which was a mistake but here we are.
Actually, I think banks launching their own crypto currencies could be the one of the best chances they've got. I assume the banks have identified valid use cases for them. The ironic thing is they sacrifice the supposed advantage of crypto currencies, which is their decentralisation.
I have been watching this crypto currency situation unfold since it began. One of my early observations was that a lot of unsavory Wall Street types flocked into it for one very good reason--they understand that it was not well regulated and there was zero oversight. That allows those Wall Street types to pull off their favorite scam--the pump and dump. It is exceedingly easy to do with cryptos.
What I have also noticed about cryptos is that if you were going to scam Millenials, there is probably no better vehicle to do it with than this pseudo-technical, phony currency that perfectly plays to all their weaknesses, especially their yen to "get out of debt quick" or "get rich quick." For months the headlines were all "Blockchain! Blockchain! Blockchain!" Another sign of a scam is using technical jargon to program people--blockchain==I get rich. Just repeat it over and over and nobody even questions where that idea came from. Something from nothing--the age old scam! Just buy at "the right time" and watch the money flow in. But can millions of people really all become rich simply by buying unproven currency type vehicles? Based on my experience, no!
But this is 2019 and you're welcome to believe whatever you want. As for me, I'm avoiding this crap like the plague and I am pretty disappointed that legitimate firms like Fidelity are getting involved with something so unproven and so subject to manipulation. It's like they just can't help themselves.
This all reminds me of the dotcom era when all you had to do was buy stock in pets.com or anything.com and watch it go through the roof...for a time.
The essence of a great scam--at first, you have the dream and they have the money and in the end, it is you with the money and their dream is dead on the floor with seemingly no one to blame but their own greed. It will be same with crypto, it might just take a little longer due to the sheer magnitude of the scam.
It seems like welcome news to passive index fund investors.
Fidelity is offering zero expense ratio index funds, as well as some really low cost funds. The money to run those funds is coming from Fidelity customers who are focused on throwing their money away on other products.
> Forty-seven percent of institutional investors think digital assets are worth investing in
They think they're worth selling.
Do the index funds participate in all of the elections for all of the companies they hold?
If yes how do the funds vote? For the interests of the individuals companies or do they push cross company agendas?
If no then does this mean that index funds are concentrating voting power in the hands of non fund holders?
Most index funds are not as active as other investors, but they tend to maintain voting shares rather than get discounted non-voting shares because the latter always end up getting screwed by the voting shares...
How? In my (Canadian) experience with dual-class shares, they’re usually the same slices of the pie and the same dividend payouts.
The usual problem is when the voting shares are impossible to actually buy, so you’re at the whims of the founding family’s ego. But then you don’t even have the choice of buying the voting. And sometimes when you could, the founders own 51%+ anyway, so you’re just buying a vote you can’t use and paying that premium to the founding family again.
Personally I would prefer if they didn't vote at all. This would have two advantages:
* There would be no question that they were harming the world by encouraging anticompetitive behavior.
* They would save money since they wouldn't have to pay people to decide how to vote.
The second of these points should be obvious to an index fund. They don't waste money trying to beat the market in terms of picking stocks, so why waste money trying to vote better than the average active investor?
All you do is give others an outsized influence. Should index funds not vote on whether index funds should receive dividends or not? If you're a Turkey, you don't abstain from the Christmas vote.
That's not the kind of question shareholders vote on. I doubt it would even be legal to pay different amounts to different shareholders within the same share class.
You're right, something so blatant probably isn't allowed, but offering cheap convertible bonds, which passives won't buy, convertible to preferential shares that can pay different dividends. That's plausible, as are 1000 other things.
I don't want to do a Godwin, but if you don't vote, someone else will still vote for Hitler, and genocide isn't the type of question citizens vote on.
Another way to go would be to just copy the average vote, which again by the premise would have to improve the quality of your vote.
If you know you are not informed, then not voting _really is_ one of the best things you can do, in a utilitarian sense.
I'll go further and accept the mere possibility of you being able to vote prevents the very worst outcomes.
I'm doubtful you would knowingly have a worse than average opinion though, Dunning Kruger (and the reverse) I would guess, would dominate, so if you think you're worse than average, that would make you better than average, and make you duty bound to vote to cancel out the guy who thinks he knows better.
Question. If I created an index and tracker that tracked low carbon companies, and that tracker voted against things that would increase the carbon intensity of it's businesses, would that tracker still be passive?
I would say yes, it is still tracking an index, and its following simple rules to further the aims of that tracker, and by extension, it's investors
(Ignoring weighting/market cap, but the point is that a lot of investing was passive anyway)
One experiences a lot less variability, bookkeeping and trading fees though.
The discussion is about the part that was not passive. It’s about passive funds replacing active fund managers, not about passive funds replacing dart-throwing retail monkeys.
As was retail investor’s selection of those active management funds.
There’s a diff between « active » investing in a hedge fund that has an AI HFT bot, and « active » investing in Fidelity’s Value Fund.
It's also common for market makers to move the market.
HFTs make their money on the difference between the bid and ask prices.
They can only exist because you're willing to sell at 10c, and I'm willing to buy at 11c. Hypothetically we could have traded directly lets say at 10.5c. So the HFTer has literally moved the market.
Buying at a higher price would tend to a higher price anchor. If I paid 11c, I wouldn't want to sell at a loss, so your 10.9c offer would be rejected, where it might have been accepted if I'd paid 10.5c.
But then ultra rational me would never buy above 12c and ultra rational you would never sell below 9c, based on current info, so irrespective of middlemen, the price would be bounded by those 2 figures.
And there isn't net buying or selling pressure so you could treat the spread as a fee in return for providing liquidity.
But yeah in practice, I think you're basically correct.
But that just goes to the point I’m making: there are varying degrees of active and passive funds. The rise of passive index funds won’t distort much of anything when funds were coming from a passive fund that tried to sell itself (and charge) as active.
If the fund is actively looking for deep value bets and trying to drum up increased value for stockholders, then it’s truly active.
But if they’re just creating a « high-income fund » and just throwing together a basket of high dividend stocks, or a real estate fund and putting together a basket of REITs, they’re effectively passive funds and have little impact on the market vs. true index funds. On average, switching between these doesn’t distort the market.
E.g. if you are buying some US pharmaceutical index fund you are buying a passive product but are actually making two very active bets: you asume that pharmaceutical industry will outperform other sectors and that US pharmaceutical firms will do better than the rest of the world.
A "entire stock market index fund" (which one?) has a methodology for weighting the funds and the markets it invests in. Most funds today weigh their selection by market capitalization. A other weigthing method, such as considering country GDP, might deliver superior results.
Also such "entire stock market index funds" usually only include large cap stocks -- small or micro cap stocks may or may not deliver better results.
Also such "entire stock market index funds" often will exclude entire countries. E.g. the very popular MSCI World and MSCI Emerging Markets funds contain 0 stocks from Ukraine but last year Ukraine had the best performing stock market worldwide.
Why?
Non-US countries usually don’t have diverse stock indexes. You’ll have their big telecoms, their big banks and a few other industries. A lot of their big industries will be owned by multinationals anyway, and the smaller ones are private.
The US large caps provide tons of international diversification, with a lot less paperwork and withholding taxes.
Google, Apple, Facebook, McDo’s, any oil company, etc. have large amounts of foreign revenue/branches, even in countries without a stock market that you could buy on.
If anything, US investors have too much international diversification when they buy US large cap indicies.
If the US economy does well but the rest doesn’t, US stock market returns will be poor.
Could be betting that the US pharmaceutical won't go the same way at the same time than the US tech sector, where you have other investments. Could be that's it's one of the only 10 funds you have access to.
Indeed. Come over to /r/leanfire or even /r/financialindependence, most of us just want to have stable 'average' returns via funds like VTSAX so that we might retire as soon as possible without betting the farm.
And active managers would not short dying businesses if they realize everyone else was blindly plowing money to it because it belonged to an index. Thus worsening the situation. The price of a stock is no longer “efficient” and not a reflection of the information available to the entire market.
Personally I wish index funds were abolished, forcing everyone to pick and choose the companies they think will flourish or fail.
I’ll keep paying $1/3k p.a. to VTI in management fees.
That's how equilibrium is reached. We don't get to know if you are a genius or an idiot, not even after the fact.
But big pension funds are also putting money into direct acquisitions instead of just buying stocks.
So, if it's a dying business everyone is pouring their money into then every active manager would search the couch for every last penny to short it with. Which is why I don't believe index funds will make up 100% of all stock assets because people who do understand the market would exploit the index fund allocation and attract more capital, and the stock picks of those successful active managers would quickly be represented in the index.
Indexing is just automated and systematized diversification. You cannot stop someone from diversifying their portfolio.
More plausible is some sort of rule preventing a single index fund from taking large positions in multiple firms the same industry; retail investors could then invest in multiple index funds, achieving the same diversification but with increased difficulty of collusion. Unclear whether that would be worth the higher costs, though, and inevitable ambiguity about what constitutes an industry.
My grandmother used to buy shares in Disney and GE because they were household names - which had little to do with their underlying financial health.
Given that even the so-called professionals that manage active funds can't consistently beat the index, J. Random Schmoe has no chance:
* https://www.aaii.com/journal/article/most-mutual-funds-do-no... * https://www.ifa.com/articles/despite_brief_reprieve_2018_spi...
PDFs:
* https://us.spindices.com/documents/spiva/spiva-us-year-end-2... * https://us.spindices.com/documents/research/research-fleetin...
E.g. https://www.umass.edu/preferen/You%20Must%20Read%20This/Barb...
JS and his dartboard won’t pay any active management fees.
Given that last time I did an IQ test I was on the right-hand side of the proverbial Bell curve, I'm not sure how well anyone that is below average (IQ 100) would fair.
I've since learned my lesson and stuck with index funds (dividends being re-invested), and gotten market returns that have been quite nice. At some point markets will tank, and I will rebalance by liquidating some bonds and picking up some more equities (selling high, buying low).
And yet @AznHisoka thinks I should not be allowed to easily get market returns by investing in index funds. (Which the Oracle of Omaha himself, Warren Buffet, suggests that most people do.)
But if the purpose of the stock market is to allocate the right amount of capital to companies based on their fundamentals and earnings, index funds don’t help.
The importance of this distinction becomes obvious when you compare the performance of public active funds, which are managing other peoples' money for a fee, and prop funds, which are only managing their own money and therefore can't profit on fee structures.
Even if the entire market is indexing, there are still fundamental mechanisms that will keep it responsive. Markets are indexed in many ways depending on what aspect of the market the indexes are trying to capture, and these different indexes weight and value the underlying stocks differently, with some indexes outperforming others which will drive allocation of capital to different indexes. And at the extremes, over-valuation is addressed by bankruptcy and under-valuation is addressed by taking a company private, removing companies from the market entirely.
There is definitely going to be a balance point where active > passive. And we might know about it 5, 10 years from now, even if it already happened.
They can't perform worse than the market, because they own shares in exactly the same proportion as the market.
The only way to performe at market average is to own a proportional share of all stocks and have no transaction costs.
Could passive index funds, which seek to mimic the stock market, actually be in control of the stock market? Are they mimicking themselves?
Should we be concerned that most passive capital is invested in the same companies, in the same proportion, weighted mainly by market cap?
Can passive index fund trading move the stock market?
If there is an economic downturn, how would a wave of cash withdrawals from passive index funds affect stock prices?
Have active managers changed their behavior in response to the rising dominance of passive index funds?
NO ONE knows the answers to these questions, at least not with certainty, because we're in uncharted territory.
This is the first time in history that a stock market has been dominated by passive index funds.
NO ONE knew the answers to those same questions about active investment either, though. Markets are markets, and behave in crazy unstable pro-cyclic ways because of psychology, not abstract theory.
Here's an obvious hypothesis: Nothing's going to change at all. The fraction of holdings in these index funds is high, but matches the fraction that was always just thrown into the "balanced random junk" segments of portfolios. Players who want to make focused bets on particular securities or industries will continue to do so, in exactly the same proportion they did before.
I mean, NO ONE knows if that is true or not, but I'd put money down on it.
That said, in the event of market stress, it seems that more individual portfolios will be more highly correlated with each other than in the past.
Isn't that a significant change? In light of it, are you willing to bet that aggregate investor behavior in a future period of stress will be similar to what we have seen in the past?
30 years ago investing in Index style mutual funds was pretty uncommon. 50 years ago Index funds didn't even exist, and you'd have to have significant wealth to own hundreds or thousands of individual stocks (especially anywhere close to market weighted). We are seeing a fundamental shift in how people invest, though whether or not that leads to a fundamentally different outcome is unknown.
The market will gravitate to its fair value based on fundamentals and other factors. Most of these passive funds just mirror an underlying benchmark but do not control it.
Most trading is done by futures, etfs, and the individual stocks that compose the index. It's sorta like a tug of war between all of these participants to reach an equilibrium and eliminate arbitrage.
"Julio Rotemberg, then a newly minted economist from Princeton, posited that “firms, acting in the interest of their shareholders,” might “tend to act collusively when their shareholders have diversified portfolios.” The idea, which Rotemberg explored in a working paper, was that if investors own a slice of every firm, they will make more money if firms compete less and collectively raise prices, at the expense of consumers"
The article does point out that there are also other opinions on the subject.
[1] https://www.theatlantic.com/magazine/archive/2017/09/are-ind...
https://www.bloomberg.com/opinion/articles/2018-12-07/regula...
One charge levelled at active management is that they're closet trackers so they own at least most of the constituents of an index. And the big insurance companies and pension funds are probably going to have their funds spread out over competing companies.
- Index funds will buy whatever there is that passes a filter (eg market cap)
- Private companies like Uber now rival the size of large cap firms
- So if you can pull it off, you can find a buyer for your VC backed firm who doesn't think.
Presumably they would start to buy after 90 days and a small chunk each trading day, determined by average daily volume and other factors.
By that point, the active buyers/shorters should do their usual bit of fighting each other until the price is « correct ».
Doing massive buy and sell orders based on known criteria would be problematic.
Their assessment will include the fact that large buy orders are coming.
> Doing massive buy and sell orders based on known criteria would be problematic.
There's a number of firms that run quant strategies based on index add/removes.
I’m sure they have the data and know which method works out best in practice.
Kinda like if I beat the price of your life insurance policy by 1 cent. I’ve effectively externalise the actuarial and marketing costs to somebody else.
A few decades ago I started dollar-cost averaging into a hot-rod actively managed fund. As always seems to happen, the fund cooled down and I was late to catch on. My money was not effectively put to use.
Then I started reading (and YouTube watching) people like Malkiel, Buffet, Bogle, Dalio, etc. They all clearly explain the benefits of index funds for the vast majority of people. I believe them.
Indexing is the way to go. Read Bogleheads.org for great advice on this and other topics.
If there is a big swing in either direction. Some stocks will get way overvalued or undervalued compared to their intrinsic value. Maybe this is beneficial to a value investor that picks stocks instead of investing in ETF's? I wonder if ETFS will make the market drop a lot in the next crash and will the etf's even track their underlying accurately? Lot's of arbitrage opportunities.
I've built my portfolios exclusively on mis-/un-priced risk for a very long time, which has always performed well, but in my experience it is easier to find these opportunities today than it was many years ago, likely due to a combination of factors.
There are also cultural and social elements. The pendulum has swung so far toward indexing being the "correct" way to invest that there is a bizarre amount of hostility out in the world toward people who assert it is possible to have consistently great performance without index investing.
I think the hostility comes from the fact that such individuals almost always make the assertion sans evidence, and often stand to make money from suckers -- in the gambling sense, i.e. people who don't know the odds -- who believe them and trust them with money. I'm sure if someone demonstrated their ability to outperform the market prospectively, and also were willing to accept outside investment, they would have people knocking down their door to get in. However, there is no entity with a long track record of outperforming the market that is both open to outside investors and claims that they will continue to outperform with a high degree of certainty.
Aside: the people want to know 1. how long you have been investing 2. the rough amount of assets you have invested 3. what your annualized rate of return is over the period mentioned in question 1. Not that this would prove anything, because anyone can claim to have had 25% ARoR over the last forty years, but it would at least be interesting to know what the claimed performance is.
I'm a long-term risk modeler, originally for fun and later for profit. I build portfolios of US large caps based on categories of risk that are not priced into the market because they are difficult to model in a conventional way. This is an entirely uncontroversial way to outperform indexes but you wouldn't build a public investment vehicle around it. My oldest continuous portfolio goes back to the turn of the century, at around 20-21% ARR (more recent portfolios are a bit better). Per year, it requires maybe several hours of my time. I have a few friends and acquaintances that seem to do a bit better (but also spend more time on it) that also trade on un-/mis-priced risk, often as a justification to polish their data science skills, across a variety of asset classes.
I am not saying it is trivial to consistently outperform the indexes, just that the difficulty is significantly overstated. The hurdle most people trip over is that there are no shortcuts to figuring out how to build your own models from first principles and how to trade them.
The difficulty isn't overstated because in aggregate it's mathematically impossible. The total market return is zero-sum so someone else has to take the other side of your bets and lose return. That someone else is not me, I'm getting the market average consistently to within a decimal point from my index fund. Here's Sharpe's simple take on it:
https://web.stanford.edu/~wfsharpe/art/active/active.htm
For anyone who misreads the subtleties of your post and thinks they cant make consistent alpha through active management. They can, but (without knowing anything about them) probably won't.
Assuming no entries or exits into a cap weighted index, there will be no trades. No trades mean no price pressure either way. So it would just be the active traders exerting price pressure. And index buyers and sellers would buy and sell everything which wouldn't misvalue any one stock.
I mean if everyone piled into the market, you would still get a bubble sure, but that would imply that at least some stocks were misvalued anyway, so we still aren't worse off.
'Intrinsic' value starts getting tricky very quickly. How do you go about defining it. You're implying it isn't the stock price, so assets minus liabilities? But then what about Uber, or Tesla.
What arbitrage opportunities are you making reference to? ETFs are basically valued via arbitrage, certain traders are allowed to swap the ETF for the basket of shares, or visa versa, so if the price moves away from the underlying shares, they arbitrage it away.
If the market is crashing then the bid ask spread is going to be very wide but i guess same will be true for common stocks. I think it is important to invest in high volume etf's like qqq/spy. So yeah you are right, arbitrage opportunities are still there i just think that during downtrends there will be more but in that case who cares about arbitrage! The best strategy is to go short.
Has this ever been observed to be the case? We have had moments of extreme or at least high volatility in the recent past and I don't recall any news articles about how VTI diverged from VTSAX. That being said, even if such a thing did happen, that would only affect people who trade the ETF during those moments of volatility, right? For anyone else, the only risk is that people would be so scared off of the ETF that there would be insufficient liquidity to restore the price to the right point. Even then, an authorized participant will eventually buy up the under-priced shares and redeem them.
It's worth pointing out that vanguard at least do a Value tracker. I suppose theres discussion to be had over whether it's 'passive' but I guess it's included in these figures.
Short selling tends to be a losers game, stocks go up more than they go down, so I wouldn't recommend that, but yes they aren't value stocks. but then my moneys in index funds, so what do I know.
Probably with put options.
https://www.zerohedge.com/news/2017-04-09/horseman-global-un...
ETFs were an outstanding idea but never meant to be used on such an excessive scale. If once stock falls and many of the ETFs have to re-balance their index to reflect this, this creates a feed back effect. And if Index ETFs and HFT are the last ones trading this stock, good luck with this.
Everything works until it doesn't.
The only time a fund needs to rebalance is when a security is removed from or added to the underlying index. I don't know how that is handled, but I suspect it is predictable and priced in.
Won't they need to rebalance then? The way it will happen is they will have to sell all the stocks in the ETF according to their percent allocation
[1]: https://www.etf.com/etf-education-center/7540-what-is-the-et...
I'm sure this is not overlooked by everyone who is trying to do better than the index.
The headline should be: Institutional and professional investors are going into cash resulting in individual investors that buy ETF's share to go up to 50 percent.
When professional will start shorting and going the other direction. Headline will be: 80 percent of falling US assets are now invested in index funds.
> Meet Bob.
> Bob is the world’s worst market timer.
> What follows is Bob’s tale of terrible timing of his stock purchases.
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
Most people are not investing for 'fun', but rather for retirement. So "never" selling, or at least not-selling for several decades, is actually a reasonable assumption.
The main problem is that the general public read headlines and see "Markets Are Crashing!!1!" and pull out. Whereas if they could keep their cool a bit, and stay invested (and ideally keeping investing (monthly?) on the way down), they'll generally end up okay when they approach retirement.
Of all the important economic issues of our time, this is not one of them.
VFTSX
It's not actually closed. Just buy the admiral version instead, same thing but cheaper.
It's interesting that this is an actively managed fund. There are actually a few indices for this kind of thing but apparently Vanguard is not using them: https://www.msci.com/esg-indexes
Which is true, because all forms of hiring are discrimination. Business discriminate against people who don't have the qualifications that they believe will positively impact their business.
If the user you responded to has reason to believe that a certain company has hired certain individuals who are not qualified to do the job they were hired for, I encourage her to say that. But it's not enough to say the practice is blanket good or bad. There are just too many variables to account for.
All are open. The old Social Index Investor shares are closed.
* Is this a bad news?
* Are there index funds that blindly follow the top 500 but actively remove dumb stocks?
* Should I avoid American-only index fund? Looks like the Chinese market is becoming pretty strong and there doesn't seem to be any insurance that the American market will stay as strong in the next 20+ years. I would comfortable betting on the world market, but not really on one country's market.
* I have some money saved up that I don't know what to do with. I'll probably look into investing for an apartment in the next 2-5 years. Should I let it sit in my bank account or should I put everything in an index fund?
Nobody can predict the future and you shouldn't get your investment advice from Hacker News, but putting everything into one investment tends to be a bad idea.
2. Any level of active management would make an index fund not an index fund. You'd be going to trying to pick the best-performing stocks, which is not what an index fund tries to do (capture the overall movements of the market).
3. The general advice is to have approximately a 65/25/10 split between SP500/international/extended market funds. You can adjust as desired.
4. Stock index funds are great for long-term investments, not so much for shorter ones. You can look at bond funds as well. If you have a good amount already (>100k maybe) you can schedule a free discussion with an advisor at places like Fidelity/Vanguard/CS and have them run you through the basics.
There are index funds that track the S&P 500. But who would decide what a "dumb" stock is? I don't even know where to start with this concept. I would not worry about this if you are an investing noob.
You should not avoid an American-only index fund. The U.S. equity market is by far the largest in the world, so a broad index of American stocks will cover a lot of diversity. That said, there are plenty of international stock funds available as well.
I would at least look at CDs (certificates of deposit) or short term bonds, which will give you better returns than sitting in a bank account. Stocks will have a better chance for an even better return... but also a chance that the market will be down when you want to get that apartment. That's a fundamental concept for investing: higher returns come with higher risk (and vice versa).
2. What is a dumb stock?
3. I don't have the answer to this but keep in mind that those with a vested interest in the success of local markets (e.g. financial advisors within a given nation) are likely to suggest that people invest more in those areas.
Your inclination to consider likely geopolitical shifts as you make these decisions is a good one.
Certainly not at half. It is an open question how high it can go before there are destabilizing effects, but it's very likely way above the 90% level.
Consider the extreme example: Let's say 99.999999% of assets are in index funds and now there are basically only 10 people left in market who are doing active investing. So when these 10 people decides to sell stock of some company, that stock will fall by some minor amount but immediately all index funds would need to react to this minor drop and sell their holdings. But that would cause more market drop and price would take a death spiral route. This basically means that those 10 people now left to do active investment can now control the market. Any of their small movements gets amplified by large gorillas of index funds.
Above is just tip of the iceburg. The secret of the success of index funds has been very simple: They aggregate all the active investors and these average turns out to be better than individual. However when number of active investors reduces, the variance would increase and this means index funds would become less and less optimal over time.
As active investors are basing their decisions on p/e ratios and EBITDA then algorithmic choices can substitute for the lack of human traders.
In fact, traders are the ones who should be worried about AI, not taxi drivers. We're going to need a lot less traders and more data scientists.
That's not how it would work.
1) When one of the 10 sells they must be selling to another of the 10 who is buying. There's no such thing as just selling. Instead the way that the price would drop would be that the 10 start trading that stock between themselves at a lower price than it had been before.
2) If the price dropped then that wouldn't mean that the index fund had to sell. The index fund aims to own a fixed proportion of each company. If they own $98 million of a $100 million company and then the share price drops in half then they now own $49 million of a $50 million company. There's no need for them to do anything.
2) Index fund must balance their portfolio. If stock A goes down and B goes up then they must sell off A and buy more of B to re-balance. At least that has been my understanding.
Above two in combination means that you can cause chain reaction which is to be expected because much larger dollars is simply trying to imitate much smaller dollars. So later gets to control the former.
They must balance to the underlying index, not so that they hold the same value of each stock. If A goes down and B goes up they don't have to do anything unless the change is so dramatic that it causes the people who compile the index to update which stocks are in the index.
What can happen is that a stock being added/removed from a major index can cause a large amount of buying/selling by index funds as they are 'forced' to add or remove that stock in their portfolio. However that is a fairly rare occurrence.
Index funds own shares in proportion to the market cap. So an index fund will own shares of B worth three times as much as their shares in A. Lets say we're looking at a fund that owns $6 million of B and $2 million of A.
Now suppose A's share price doubles to $200 and B's share price falls to $125. Then the value of the index funds shares will now be $2 million × ($200/$100) = $4 million of A, and $6 million × ($125/$150) = $5 million of B. Meanwhile A's market cap has changed to 1000000 × $200 = $200 million, and B's market cap has changed to 2000000 × $125 = $250 million.
Then B's market cap is 1.25 of A's market cap, so the index fund wants to be holding shares in B worth 1.25 the value of its shares in A. It currently has $4 million of A, so it wants to be holding 1.25 × $4 million = $5 million of B, which in fact is the amount that it is already holding.
As the proportion of active investors in the market falls, those that remain enjoy a greater advantage. There will therefore always be some minimum threshold of actively managed assets (due to the marginal returns from active management eventually exceeding the marginal fees).
It's an open question as to what this threshold might be, but it will certainly be orders of magnitude above what you describe.
I can only rely on two things:
(1) This option is cheap in terms of fewer fees, and easier in that I don't have to agonize over picking obscure stocks.
(2) If I get fucked, everyone is fucked, so I'm sure we'll figure something out or just be on our merry way to hell together.
A little shrewd and fatalistic I guess.