A look behind the scenes at an index fund with Vanguard's Gerry O'Reilly(bloomberg.com)
bloomberg.com
A look behind the scenes at an index fund with Vanguard's Gerry O'Reilly
http://www.bloomberg.com/news/articles/2016-08-15/vanguard-s-gerry-o-reilly-offers-a-rare-look-inside-an-index-fund
142 comments
This is what happens when some companies project investing as a quick and slick process. Answer these 5 questions and here you go: this is your risk tolerance and you are saving away in taxes and doing rebalancing. The truth is that investing is just another application to data science and machine learning and a lot of hard work. Little things matter and even simple rebalancing is not as simple given that periodic rebalancing can have huge market timing effects. We recently did a webinar on how to approach investing as a data science problem instead of a 'finance' problem: https://www.qplum.co/webinars/past/07072016/skill-vs-luck
A friend of mine invested in two roboadvisors (wealthfront and betterment) at end of April and since then they have done nothing, not a single trade. Not a single trade. In the mean while, markets have scaled new heights. Ten year rate dropped to 1.37%!. Brexit happened. The FED unlike happened. There were huge gyrations in the unemployment rate. Vanguard systematic fund VMNVX did much better.
I have worked in trading all my work life and I know how hard it is, how humbling it is, and how meaningful it is. I hate it when people sell crap as smart.
As Dean Kansky in Serendipity said "They should make pills for this."
[deleted]
when the corner shoe boy gives you stock advice, its time to get the hell outta there!
I'm probably being persnickety, but I think the title here on HN is mildly misleading, as he is actually named and the actual title of the Bloomberg article calls him "Basically Anonymous" ... not actually anonymous
I'd probably change Anonymous to 'Little-known'. Anonymous would suggest that nobody has any idea who is managing the money...
I agree, we updated the title from “Anonymous Vanguard Fund Manager Oversees $800B” to the less click-baity subtitle.
Yes. And overseeing ETFs is a little different than trying to pick $800 billion in stocks.
meh - made sense to me - "not distinctive" is a very common secondary meaning equivalent to "faceless". I think I'd need a stronger term like secret, covert, unknown etc. to suggest something different.
There isn't much to manage since they are index funds.
(Edit: Ok, I'll accept the downvotes. I mean not as much work as other fund managers. eg don't have to select companies to invest in.)
(Edit: Ok, I'll accept the downvotes. I mean not as much work as other fund managers. eg don't have to select companies to invest in.)
This was covered in the article:
Vanguard has invested heavily in technology. Algorithms help managers figure out where to buy and sell while minimizing market impact. Risk software makes sure the portfolio stays close to the index. Because of these technologies, Brennan says, “we probably have the most assets per head of any asset manager in the world.” (The key determinant of staffing, he says, is the number of portfolios, not the assets in them.)
But you can automate only so much, and the tough decisions still fall to the portfolio managers. When is the best time to buy an illiquid stock that trades only once or twice a day? How do you handle a corporate deal structured in an unusual way or the issuing of a new class of stock?
“People think a computer could run index funds—and they’re so wrong,” says Brian Bruce, a former index fund manager who’s now chief executive officer of Hillcrest Asset Management in Plano, Texas, and editor-in-chief of the Journal of Index Investing.
Vanguard has invested heavily in technology. Algorithms help managers figure out where to buy and sell while minimizing market impact. Risk software makes sure the portfolio stays close to the index. Because of these technologies, Brennan says, “we probably have the most assets per head of any asset manager in the world.” (The key determinant of staffing, he says, is the number of portfolios, not the assets in them.)
But you can automate only so much, and the tough decisions still fall to the portfolio managers. When is the best time to buy an illiquid stock that trades only once or twice a day? How do you handle a corporate deal structured in an unusual way or the issuing of a new class of stock?
“People think a computer could run index funds—and they’re so wrong,” says Brian Bruce, a former index fund manager who’s now chief executive officer of Hillcrest Asset Management in Plano, Texas, and editor-in-chief of the Journal of Index Investing.
Minimising tracking error is no small feat. Don't underestimate active management (e.g. employees working on systems and algorithms) in index funds.
> "450 billion Vanguard Total Stock Market Index Fund matches the performance of its 3,600-stock benchmark. That means owning stocks whether they’re plunging, surging, or unchanged."
They mention some reasons that human decision-makers are needed, but I'm actually not convinced. Why not just two algo indexes? One tries to get the best price, the other simply doesn't trade the difficult illiquid stocks?
I'm surprised an enterprising company hasn't come along that allows you to pick all your own stocks, and allow them to be rolled up in an index. That kind of service shouldn't be too hard to create from a technical point of view, so I'm assuming the issue is with regulation.
They mention some reasons that human decision-makers are needed, but I'm actually not convinced. Why not just two algo indexes? One tries to get the best price, the other simply doesn't trade the difficult illiquid stocks?
I'm surprised an enterprising company hasn't come along that allows you to pick all your own stocks, and allow them to be rolled up in an index. That kind of service shouldn't be too hard to create from a technical point of view, so I'm assuming the issue is with regulation.
It's not that simple. First of all, the goal is to track the index as closely as possible, not to get the best price and certainly not to avoid illiquid stocks.
Moreover, how would you balance these two algorithms' holdings?
Regardless, there are a great many nuances, complications, and technicalities involved in trying to keep an index fund on-target. Not just the pricing and liquidity issues mentioned in this article. This is especially true for very large funds with hundreds of billions under management. Index funds are as close as one can get to full automation today, but taking the last step to full automation won't happen without fundamental changes in underlying systems like the exchanges.
It's not clear if it would even be advantageous to automate human decisions away completely here. Proposed automations often run in parallel simulations to a manager's work and are plugged in when they seem empirically to do better than a human manager can. Obviously that hasn't been the case across the board just yet.
Moreover, how would you balance these two algorithms' holdings?
Regardless, there are a great many nuances, complications, and technicalities involved in trying to keep an index fund on-target. Not just the pricing and liquidity issues mentioned in this article. This is especially true for very large funds with hundreds of billions under management. Index funds are as close as one can get to full automation today, but taking the last step to full automation won't happen without fundamental changes in underlying systems like the exchanges.
It's not clear if it would even be advantageous to automate human decisions away completely here. Proposed automations often run in parallel simulations to a manager's work and are plugged in when they seem empirically to do better than a human manager can. Obviously that hasn't been the case across the board just yet.
> I'm surprised an enterprising company hasn't come along that allows you to pick all of our stocks, and allow them to be rolled up in an index.
Do you mean basket trading? https://www.interactivebrokers.co.jp/jp/?f=/en/trading/order...
Do you mean basket trading? https://www.interactivebrokers.co.jp/jp/?f=/en/trading/order...
It's not entirely clear from that site, but it looks like they just let you batch up a bunch of separate orders in a single spreadsheet, and execute each one of them.
The grandparent post seems to be calling for a service that lets me say, "I'd like to start my own custom-ETF, consisting of A% Facebook, B% AT&T, C% Walmart, D% McDonalds, etc." and then let me invest money that "fund" every so often. I agree this would be a neat service. Currently, if you want a portfolio of specific diversified stocks, you have to either 1. Find a fund that is similar enough to the basket of stocks that you would like or 2. Purchase each stock individually (getting eaten up in commission fees). Both are less than ideal.
The grandparent post seems to be calling for a service that lets me say, "I'd like to start my own custom-ETF, consisting of A% Facebook, B% AT&T, C% Walmart, D% McDonalds, etc." and then let me invest money that "fund" every so often. I agree this would be a neat service. Currently, if you want a portfolio of specific diversified stocks, you have to either 1. Find a fund that is similar enough to the basket of stocks that you would like or 2. Purchase each stock individually (getting eaten up in commission fees). Both are less than ideal.
Motif investing does that exactly.
I am not sure that you appreciate what is involved.
Running an index fund is largely mechanical, but the main issue is dealing costs.
What Vanguard have to do is seemingly impossible, which is to deal at the mid-price every day, when they invest net inflows (or dis-invest the net outflow).
They also have to deal at the mid-point whenever the index changes (usually every quarter).
Running an index fund is largely mechanical, but the main issue is dealing costs.
What Vanguard have to do is seemingly impossible, which is to deal at the mid-price every day, when they invest net inflows (or dis-invest the net outflow).
They also have to deal at the mid-point whenever the index changes (usually every quarter).
> I'm surprised an enterprising company hasn't come along that allows you to pick all your own stocks, and allow them to be rolled up in an index. That kind of service shouldn't be too hard to create from a technical point of view, so I'm assuming the issue is with regulation.
This is what Motif does, but it's super expensive, and picking stocks is a terrible idea. Vanguard/Betterment are cheap because everyone owns the same thing and you can trade between customers for free.
https://www.motifinvesting.com
This is what Motif does, but it's super expensive, and picking stocks is a terrible idea. Vanguard/Betterment are cheap because everyone owns the same thing and you can trade between customers for free.
https://www.motifinvesting.com
https://www.motifinvesting.com/ does exactly that.
The risk with ETF index funds is when the market truly deteriorates ETF's can simply fall apart. Particularly in illiquid or quickly falling markets.
There was a paper about this a year or two ago which I'm unable to find now. I'd caution risk for anyone planning on using ETF's to ride out a storm.
EDIT: I'll have to see if I can find the paper again. The basic summary was that in situations like 2008 ETF's failed in ways that were materially worse than holding the same basket of assets.
But this is not investment advice. Make up your own mind and plan according to your risk tolerances.
There was a paper about this a year or two ago which I'm unable to find now. I'd caution risk for anyone planning on using ETF's to ride out a storm.
EDIT: I'll have to see if I can find the paper again. The basic summary was that in situations like 2008 ETF's failed in ways that were materially worse than holding the same basket of assets.
But this is not investment advice. Make up your own mind and plan according to your risk tolerances.
Almost every investment deteriorates when the market does. In terms of stability and long term gains, ETFs are the best bet. You have to be willing to take high risk if you want to invest in things that are not affected by market deterioration, and many people don't have the ability to take that risk. Overall, anyone reading these comments, please take all investing advice as a grain of salt.
Google disagrees: https://goo.gl/Ib4Jty
I'd caution anyone from parking their money anywhere else but Vanguard index ETFs.
I'd caution anyone from parking their money anywhere else but Vanguard index ETFs.
I don't recall many ETFs failing in material ways in 2008 - I do agree with your view on exercising caution with ETFs. There are 5 different ETF legal structures and they each provide different investor protections. Few retail investors who buy ETFs know (or care) about the differences - but in times of stress they could make a difference.
Very much depends on the ETF. Some can have issues with contango [1] for example. This is a big problem with the oil ETFs.
[1] https://en.wikipedia.org/wiki/Contango
EDIT
To add relative context from the link:
A crude oil contango occurred again in January 2009, with arbitrageurs storing millions of barrels in tankers to profit from the contango (see oil-storage trade). But by the summer, that price curve had flattened considerably. The contango exhibited in Crude Oil in 2009 explains the discrepancy between the headline spot price increase (bottoming at $35 and topping $80 in the year) and the various tradeable instruments for Crude Oil (such as rolled contracts or longer-dated futures contracts) showing a much lower price increase.[10] The USO ETF also failed to replicate Crude Oil's spot price performance.
[1] https://en.wikipedia.org/wiki/Contango
EDIT
To add relative context from the link:
A crude oil contango occurred again in January 2009, with arbitrageurs storing millions of barrels in tankers to profit from the contango (see oil-storage trade). But by the summer, that price curve had flattened considerably. The contango exhibited in Crude Oil in 2009 explains the discrepancy between the headline spot price increase (bottoming at $35 and topping $80 in the year) and the various tradeable instruments for Crude Oil (such as rolled contracts or longer-dated futures contracts) showing a much lower price increase.[10] The USO ETF also failed to replicate Crude Oil's spot price performance.
Somewhat related is this memo by Howard Marks that talks about the liquidity of ETFs (starts on page 6 -- the whole thing is a great read). When the market sharply drops and there is no liquidity for sellers, it might be even worse for holders of ETFs as they will have even less liquidity than the sellers of the underlying stock.
[1] https://www.oaktreecapital.com/docs/default-source/memos/201...
[1] https://www.oaktreecapital.com/docs/default-source/memos/201...
are you talking about gapping to a discount? market makers can exchange baskets of securities for shares and vice versa, so over any significant period of time, that shouldn't be a risk.
a single company managing that big a share of the available float worries me -- not from some paranoid, political angle, but from an error and risk standpoint.
there is a lot of market infrastructure and jurisprudence that exists specifically for this problem. Trades can and are canceled as the situation demands[0].
[0] https://www.theice.com/publicdocs/endex/ICE_Endex_Trade_Canc...
[0] https://www.theice.com/publicdocs/endex/ICE_Endex_Trade_Canc...
tell that to knight ...
A dumb question I've always had: for their S&P 500 Fund, is Vanguard just free-riding off the work of S&P, leading to their low management fees? Or is the work that goes into selecting the 500 companies in the index pretty minimal?
The S&P 500 is just a list of the largest 500 companies by market cap.
Managing the S&P 500 fund is actually pretty tricky since everyone knows when the index changes and they know what trades you have to make so they try to take money from you. You have to employ a lot of tricks to avoid being victimized as an index fund.
Edit: I should point out that the index isn't really _just_ the largest 500 companies; they try to keep it properly weighted by sector and some other considerations as well.
Managing the S&P 500 fund is actually pretty tricky since everyone knows when the index changes and they know what trades you have to make so they try to take money from you. You have to employ a lot of tricks to avoid being victimized as an index fund.
Edit: I should point out that the index isn't really _just_ the largest 500 companies; they try to keep it properly weighted by sector and some other considerations as well.
> Managing the S&P 500 fund is actually pretty tricky since everyone knows when the index changes and they know what trades you have to make so they try to take money from you. You have to employ a lot of tricks to avoid being victimized as an index fund
I'd agree that managing an ETF is probably harder than most people think, but its very debatable as to if ETF's are being "victimized". Like the linked article says, if you want to buy large chunks of a company then you have to pay for it.
http://kiddynamitesworld.com/where-bloomberg-discovers-that-...
I'd agree that managing an ETF is probably harder than most people think, but its very debatable as to if ETF's are being "victimized". Like the linked article says, if you want to buy large chunks of a company then you have to pay for it.
http://kiddynamitesworld.com/where-bloomberg-discovers-that-...
Notwithstanding the post-hoc rationalization of one of the people trying to take advantage of the indexers, I suspect that if you asked them, the indexers would all prefer 100% to be able to make their trades without the arbitrageurs and do not feel any sort of debt of gratitude to them for "pre-positioning" the market.
> I should point out that the index isn't really _just_ the largest 500 companies; they try to keep it properly weighted by sector and some other considerations as well.
Which leads to my question--is that extra work relatively minimal or significant and hard to produce?
Which leads to my question--is that extra work relatively minimal or significant and hard to produce?
The difficulty comes when operating at Vanguard's scale. When buying large amounts of any particular stock you want to make sure you don't move the market too much (to minimize the average cost for that trade).
Boiling it down, the S&P 500 is the strategy of riding the winners and dumping the losers. Most active investors have the reverse strategy - dumping the winners (locking in profits) and keeping the losers (don't sell at a loss).
Do you mind elaborating on that point? I'm interested in hearing more
When S&P announces results of the S&P 500 it is for fictional stocks: they don't have a fund of their own. They just say that if had bought these 500 stocks in 1957, and traced only on the dates that the dates/prices the index did you would have so much. This is impossible to do though (expect for the smallest investors), the very act of trading a stock changes the price. Most mutual funds have enough stock that they have to consider the effect of their trade on the price of the stock: if they want to invest in a company it is done over weeks and months to ensure the price doesn't change just as a result of their actions.
A simple example: lets say company X and Y are both on the index and they decide to merge one company X on such an such a date. In order to keep 500 stocks in the index S&P has to choose something to replacement. You don't have to be very smart to see that X and Y are in talks about merging months in advance. It isn't hard to figure that the stock S&P chooses will be one of a few: Buy a bunch of them each at today's prices. When the merge happens all those index funds now buy the replacement stock which drives the price up, you have shares at an inflated price to sell to those funds. (You have figure out when to sell the stocks that were not added - but S&P is unlikely to add a bad stock so as an investment these are likely to do okay). This is easy if the index funds try to hold exactly what the S&P 500 has in it.
Because of the above index funds promise to mirror the S&P500 results, but not the actual stocks. It is easy to say mirror results, it is much harder to pull that off, even if we ignore those above who are trying to cheat you, index funds tend to be the largest funds (because they do so well they are popular!) which means most of your trades will affect the price of the stock.
There is a lot more involved (much of it that I don't know), but the above is a simple example that will get you on the right track of thinking.
A simple example: lets say company X and Y are both on the index and they decide to merge one company X on such an such a date. In order to keep 500 stocks in the index S&P has to choose something to replacement. You don't have to be very smart to see that X and Y are in talks about merging months in advance. It isn't hard to figure that the stock S&P chooses will be one of a few: Buy a bunch of them each at today's prices. When the merge happens all those index funds now buy the replacement stock which drives the price up, you have shares at an inflated price to sell to those funds. (You have figure out when to sell the stocks that were not added - but S&P is unlikely to add a bad stock so as an investment these are likely to do okay). This is easy if the index funds try to hold exactly what the S&P 500 has in it.
Because of the above index funds promise to mirror the S&P500 results, but not the actual stocks. It is easy to say mirror results, it is much harder to pull that off, even if we ignore those above who are trying to cheat you, index funds tend to be the largest funds (because they do so well they are popular!) which means most of your trades will affect the price of the stock.
There is a lot more involved (much of it that I don't know), but the above is a simple example that will get you on the right track of thinking.
But you can trade at the closing price, which is the one used by S&P to do their numbers, can't you?
No you can't. You can only buy a stock based on the set of offers to sell that stock. The closing price is the just the price that marked the last trade of the day, and isn't otherwise special.
Of course you can buy at the closing price. There are MOC and LOC orders for doing just that (Market On Close and Limit On Close).
The former indicates that you must get your order filled at the closing price, the latter allows you to specify a limit at which you'll go to, in order to trade at the closing price.
How else would funds that need to trade at the closing price, actually trade at the closing price?
Now you may not like the closing price, but that's another story.
> The closing price is the just the price that marked the last trade of the day, and isn't otherwise special.
I guess i should also point out that many ETF's mark their value based on the closing prices of the NYSE or Nasdaq making their closing prices very important.
The former indicates that you must get your order filled at the closing price, the latter allows you to specify a limit at which you'll go to, in order to trade at the closing price.
How else would funds that need to trade at the closing price, actually trade at the closing price?
Now you may not like the closing price, but that's another story.
> The closing price is the just the price that marked the last trade of the day, and isn't otherwise special.
I guess i should also point out that many ETF's mark their value based on the closing prices of the NYSE or Nasdaq making their closing prices very important.
Those are still just ordinary trades that happen at the end of the day. You're still just pulling orders off of the queue of sell orders if you're buying. The final close price will of course be the price after these trades are executed, and you aren't guaranteed to even get the close price.
> Those are still just ordinary trades that happen at the end of the day. You're still just pulling orders off of the queue of sell orders if you're buying. The final close price will of course be the price after these trades are executed, and you aren't guaranteed to even get the close price.
I'm pretty sure at this point I'm being trolled but just in case you are being serious and don't know how to google......
https://www.nyse.com/markets/nyse-arca/auctions
I'm pretty sure at this point I'm being trolled but just in case you are being serious and don't know how to google......
https://www.nyse.com/markets/nyse-arca/auctions
Are you disputing that if you issue such a trade that you are not guaranteed to be able to execute it? Because, I assure you, there is no such guarantee. I'm not even sure why this requires some special explanation. There have to be enough people willing to trade at that price. The exchange isn't going to force people to trade with you.
hold on, let me have some time to adjust for all the goal post moves you've done here.
> No you can't. You can only buy a stock based on the set of offers to sell that stock
First you said that you can't buy/sell at the closing price and I showed you that this is wrong. Infact there are a whole lot of people who are obligated to trade at the closing price
Then you said the closing price wasn't special. This as well was shown to be false as many ETF's are marked by the closing prices of certain markets, notably the NYSE.
Then you said you aren't guaranteed to get the closing price. This was an even stranger error as the message before I showed you the MOC order which indicates that you will trade at the closing price.
Finally you tripled down on this mistake by changing your argument that technically there might not be any trading partner at the close.
This is technically true that in theory it might happen, but in practice I'll sit and wait for you to find me a case where this happened.
I mean think about it. You put out an MOC order that indicates you need to get a buy order filled. Unless you are trying to buy some crazy amount of shares, you will get filled. depending on the price the closing price can move up to 10% or 20%. This means that an arbitrager can pick up shares on the cheap or sell them for an artificially high price.
The system just works.
I get that you don't work in finance but you continue to keep making the same false statements over and over again:(
> No you can't. You can only buy a stock based on the set of offers to sell that stock
First you said that you can't buy/sell at the closing price and I showed you that this is wrong. Infact there are a whole lot of people who are obligated to trade at the closing price
Then you said the closing price wasn't special. This as well was shown to be false as many ETF's are marked by the closing prices of certain markets, notably the NYSE.
Then you said you aren't guaranteed to get the closing price. This was an even stranger error as the message before I showed you the MOC order which indicates that you will trade at the closing price.
Finally you tripled down on this mistake by changing your argument that technically there might not be any trading partner at the close.
This is technically true that in theory it might happen, but in practice I'll sit and wait for you to find me a case where this happened.
I mean think about it. You put out an MOC order that indicates you need to get a buy order filled. Unless you are trying to buy some crazy amount of shares, you will get filled. depending on the price the closing price can move up to 10% or 20%. This means that an arbitrager can pick up shares on the cheap or sell them for an artificially high price.
The system just works.
I get that you don't work in finance but you continue to keep making the same false statements over and over again:(
You're being intentionally obtuse, for what, internet points?
> kgwgk: But you can trade at the closing price, which is the one used by S&P to do their numbers, can't you?
> readams: No you can't. You can only buy a stock based on the set of offers to sell that stock
readams is unequivocally correct here. You can attempt to trade at the closing price, but doing so is entirely at the mercy of whether or not enough open offers exist to sell that stock.
> chollida1: Then you said the closing price wasn't special. This as well was shown to be false as many ETF's are marked by the closing prices of certain markets, notably the NYSE.
This point by readams is also true. The closing price of a stock isn't special — it's, as (s)he said, simply the price of the last trade of the day. The fact that some ETFs are marked by the price of market close makes their trading price "special", but that doesn't imply anything particular about the closing price of the asset(s) they're based on.
> chollida1: Then you said you aren't guaranteed to get the closing price. This was an even stranger error as the message before I showed you the MOC order which indicates that you will trade at the closing price.
Again, readams is correct. You're guaranteed to get the closing price if and only if there are open orders at that price. Which is a big if and only if, and not actually a guarantee.
> chollida1: Finally you tripled down on this mistake by changing your argument that technically there might not be any trading partner at the close. This is technically true that in theory it might happen, but in practice I'll sit and wait for you to find me a case where this happened.
Consider the context of this entire conversation: index funds that manage billions in assets. If you don't think they can utterly exhaust open buy/sell orders at market close for any trade they need to execute to track their index, you've lost your mind. This whole thread was about how these funds have to strategically place their orders to track the underlying index as faithfully as possible, without losing their shirts to vultures who know that large funds have to execute certain orders to stay on track.
> kgwgk: But you can trade at the closing price, which is the one used by S&P to do their numbers, can't you?
> readams: No you can't. You can only buy a stock based on the set of offers to sell that stock
readams is unequivocally correct here. You can attempt to trade at the closing price, but doing so is entirely at the mercy of whether or not enough open offers exist to sell that stock.
> chollida1: Then you said the closing price wasn't special. This as well was shown to be false as many ETF's are marked by the closing prices of certain markets, notably the NYSE.
This point by readams is also true. The closing price of a stock isn't special — it's, as (s)he said, simply the price of the last trade of the day. The fact that some ETFs are marked by the price of market close makes their trading price "special", but that doesn't imply anything particular about the closing price of the asset(s) they're based on.
> chollida1: Then you said you aren't guaranteed to get the closing price. This was an even stranger error as the message before I showed you the MOC order which indicates that you will trade at the closing price.
Again, readams is correct. You're guaranteed to get the closing price if and only if there are open orders at that price. Which is a big if and only if, and not actually a guarantee.
> chollida1: Finally you tripled down on this mistake by changing your argument that technically there might not be any trading partner at the close. This is technically true that in theory it might happen, but in practice I'll sit and wait for you to find me a case where this happened.
Consider the context of this entire conversation: index funds that manage billions in assets. If you don't think they can utterly exhaust open buy/sell orders at market close for any trade they need to execute to track their index, you've lost your mind. This whole thread was about how these funds have to strategically place their orders to track the underlying index as faithfully as possible, without losing their shirts to vultures who know that large funds have to execute certain orders to stay on track.
But what if there aren't enough people willing to sell at the closing price to get all the shares you need?
Then you don't get all the shares you need. It's a marketplace like any other with slightly more complicated rules. Nothing magical about it.
Right, that was kind of my point as the parent seemed to be implying you could perform an arbitrary amount of trades at the closing price and would be somehow magically guaranteed to fill the orders. Or at least that's how I read it. Interesting discussion nonetheless.
[deleted]
Membership in the S&P 500 is determined by committee, but the methodology can be reviewed here: http://us.spindices.com/documents/methodologies/methodology-...
Wikipedia says:
Limitations on types of securities:
> Securities that are ineligible for inclusion in the index are limited partnerships, master limited partnerships, OTC bulletin board issues, closed-end funds, ETFs, ETNs, royalty trusts, tracking stocks, preferred stock, unit trusts, equity warrants, convertible bonds, investment trusts, ADRs, ADSs and MLP IT units
Limitations on exchanges:
> The securities must be publicly listed on either the NYSE or NASDAQ.
And of course the actual selection criteria is even more elaborate.
Wikipedia says:
Limitations on types of securities:
> Securities that are ineligible for inclusion in the index are limited partnerships, master limited partnerships, OTC bulletin board issues, closed-end funds, ETFs, ETNs, royalty trusts, tracking stocks, preferred stock, unit trusts, equity warrants, convertible bonds, investment trusts, ADRs, ADSs and MLP IT units
Limitations on exchanges:
> The securities must be publicly listed on either the NYSE or NASDAQ.
And of course the actual selection criteria is even more elaborate.
[deleted]
Vanguard doesn't just "use" the S&P 500, they pay for it. https://us.spindices.com/services/index-licensing/
Thanks!
There is no work in selecting the companies-what is difficult is running a fund with very low dealing costs.
Many indices have well publicized "index methodology" which describes how companies are added and deleted. For the most part, the rules are quite linear and deterministic... But sometimes a human index committee has to meet to make decisions.
https://us.spindices.com/documents/methodologies/methodology...
After some research in personal finance last week, I moved my balance from Wealthfront to Vanguard mutual funds/ETFs. I was already using them for my 401k. Their expense ratios are the lowest in the industry and they also have managed retirement funds you can use to replace Wealthfront if you are lazy. Here is a quick way to learn about the Bogleheads investment philosophy.
[0] https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_...
[0] https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_...
I too moved from a roboadvisor (Betterment) to Vanguard. The knowledge you need to make effective decisions on your own in Vanguard only takes 2-3 hours to acquire (at the Bogleheads link you provided). Highly recommend people take the time to learn instead of having your assets charging quarter after quarter by a roboadvisor.
EDIT: I'd still love for Vanguard to create Betterment's version of RetireGuide, which takes into account your income and various other financial parameters, and tells you how much to save in which accounts (tax deferred, 401k, etc). I'm a sucker for sexy UX.
https://www.betterment.com/retirement/
https://youtu.be/W6zk2Ki83Ug?t=23
EDIT: I'd still love for Vanguard to create Betterment's version of RetireGuide, which takes into account your income and various other financial parameters, and tells you how much to save in which accounts (tax deferred, 401k, etc). I'm a sucker for sexy UX.
https://www.betterment.com/retirement/
https://youtu.be/W6zk2Ki83Ug?t=23
So the general goal with Bogleheads is a way to retire wealthy as a middle-income earner? Via long term saving?
I've always liked that idea as an alternative to doubling down with entrepreneurship. There's always the constant internal debate between both paths. It's nice to have a good guide to map out how to accomplish it, as the investment path comes with much more certainty if you have the right amount of self-control.
I've always liked that idea as an alternative to doubling down with entrepreneurship. There's always the constant internal debate between both paths. It's nice to have a good guide to map out how to accomplish it, as the investment path comes with much more certainty if you have the right amount of self-control.
>> So the genral goal with Bogleheads is a way to retire wealthy as a middle-income earner? Via long term saving?
More focused on the hows of the saving than the goal of it. Although there's some overlap it isn't the same type of community as something like Mr. Mustache Man that emphasizes a specific life-plan (in that case very early retirement).
It's a helpful community. Sometimes a bit doctrinaire about "rules of thumb" that are very useful for many people, but aren't exactly laws of the universe, but that's hardly the worst thing in the world.
More focused on the hows of the saving than the goal of it. Although there's some overlap it isn't the same type of community as something like Mr. Mustache Man that emphasizes a specific life-plan (in that case very early retirement).
It's a helpful community. Sometimes a bit doctrinaire about "rules of thumb" that are very useful for many people, but aren't exactly laws of the universe, but that's hardly the worst thing in the world.
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Just make it automatic. Put 15% in every check and invest intelligently.
Don't be a trader, but don't have a religious acolyte of someone's investment philosophy. Most quarters my portfolios are growing 2-3x than my contributions. It's a great feeling.
Don't be a trader, but don't have a religious acolyte of someone's investment philosophy. Most quarters my portfolios are growing 2-3x than my contributions. It's a great feeling.
Vanguard's "Personal Advisor Service" might be what you're looking for here:
https://investor.vanguard.com/advice/personal-advisor
https://investor.vanguard.com/advice/personal-advisor
Thank you!
I did the same thing about 2 years ago, after I calculated how much in fees Wealthfront (or Betterment) would cost me. I also didn't agree with some of the investment choices they force you to make (Wealthfront invested 5% in commodities, Betterment is heavily biased towards foreign stocks), which turned out to be good calls on my part - at least for now.
Anyway, investing a portion of each paycheck turned out to be too much repetitive work, so I wrote a cron job to do it for me automatically (more work, but more interesting work!). Then, I added automatic tax-loss harvesting once Betterment added theirs. Then, some friends wanted to use it, so I built a UI.
I'm thinking about releasing it to the public. To do that, I would have to become a registered investment advisor, but that's not a big deal - just taking a test and filling out some paperwork. Would anyone be interested in paying $10/month for this service? I'm currently working on setting up a marketing site explaining what this thing does: https://zenve.st
Anyway, investing a portion of each paycheck turned out to be too much repetitive work, so I wrote a cron job to do it for me automatically (more work, but more interesting work!). Then, I added automatic tax-loss harvesting once Betterment added theirs. Then, some friends wanted to use it, so I built a UI.
I'm thinking about releasing it to the public. To do that, I would have to become a registered investment advisor, but that's not a big deal - just taking a test and filling out some paperwork. Would anyone be interested in paying $10/month for this service? I'm currently working on setting up a marketing site explaining what this thing does: https://zenve.st
TBH, I am hoping somebody pushes a decent implementation of this to github.
I am personally not willing to pay monthly, and definitely not willing to share brokerage credentials, with a SaaS version.
I am personally not willing to pay monthly, and definitely not willing to share brokerage credentials, with a SaaS version.
This is very cool. How do you allocate the money (i.e. into which Vanguard funds and what percentage each)? I understand that you do a risk tolerance test, but how do you diversify among asset classes? Also how are you going about tax loss harvesting?
Thanks for the kind words!
It basically follows the Bogleheads approach: https://www.bogleheads.org/wiki/Getting_started
You get roughly your age as the percentage invested in bonds, with some adjustments up or down for risk tolerance. For taxable accounts, the bonds will be VTEB (tax-free munis). For nontaxable accounts, the bonds will be VCIT/VWOB (corporate bonds / emerging market bonds). The stock ETFs are VTI (US), VEA (foreign developed), and VWO (emerging markets). Nontaxable accounts also get VNQ (real estate), based on how much real estate you already own.
For example, my taxable account is: 60% VTI, 18% VEA, 12% VWO, 10% VTEB
Tax-loss harvesting is a bit tricky. In order to tax-loss harvest, you have to sell one ETF and buy another correlated ETF. This is usually done by purchasing another company's ETFs (ex: Schwab). Unfortunately, while Vanguard charges no fees for its own ETFs, it does charge fees for others' ETFs.
The algorithm takes this into account though, so it only initiates a harvest if the tax refund you'd get is significantly larger than the cost of buying the non-vanguard ETF. In order to make this cheaper, VTI is paired with VOO - even though the index tracked is different, they are highly correlated with each other (>99%).
It basically follows the Bogleheads approach: https://www.bogleheads.org/wiki/Getting_started
You get roughly your age as the percentage invested in bonds, with some adjustments up or down for risk tolerance. For taxable accounts, the bonds will be VTEB (tax-free munis). For nontaxable accounts, the bonds will be VCIT/VWOB (corporate bonds / emerging market bonds). The stock ETFs are VTI (US), VEA (foreign developed), and VWO (emerging markets). Nontaxable accounts also get VNQ (real estate), based on how much real estate you already own.
For example, my taxable account is: 60% VTI, 18% VEA, 12% VWO, 10% VTEB
Tax-loss harvesting is a bit tricky. In order to tax-loss harvest, you have to sell one ETF and buy another correlated ETF. This is usually done by purchasing another company's ETFs (ex: Schwab). Unfortunately, while Vanguard charges no fees for its own ETFs, it does charge fees for others' ETFs.
The algorithm takes this into account though, so it only initiates a harvest if the tax refund you'd get is significantly larger than the cost of buying the non-vanguard ETF. In order to make this cheaper, VTI is paired with VOO - even though the index tracked is different, they are highly correlated with each other (>99%).
Be careful. Buying an ETF from another vendor that tracks the same index, like say an S&P 500 index ETF from Vanguard vs. Fidelity, can still trigger a wash sale. Granted, it's harder to find through simple transaction matching, but an audit might trip you up.
Yes, I agree. The pairs Zenvest uses for tax-loss harvesting all track different indexes (another reason why VTI is paired with VOO instead of SCHB - even though the indexes VTI and SCHB track are nominally different, they consist of the same stocks):
VTI (Total US Stock market) / VOO (S&P 500)
VEA (FTSE Developed All Cap ex US, 3735 stocks) / SCHF (FTSE Developed ex-US, 1471 stocks)
VWO (FTSE Emerging Markets All Cap China) / SCHE (FTSE Emerging Index)
VTI (Total US Stock market) / VOO (S&P 500)
VEA (FTSE Developed All Cap ex US, 3735 stocks) / SCHF (FTSE Developed ex-US, 1471 stocks)
VWO (FTSE Emerging Markets All Cap China) / SCHE (FTSE Emerging Index)
Not the OP but I would definitely start here to get a handle on the Bogle approach: https://www.bogleheads.org/wiki/Getting_started
The Bogleheads forum is also often very useful for getting your personal finance questions answered, though of course the usual Internet stranger disclaimer applies.
The Bogleheads forum is also often very useful for getting your personal finance questions answered, though of course the usual Internet stranger disclaimer applies.
What kind of gains do you see in practice with tax lots harvesting?
The maximum yearly gain is $3000 * your marginal income tax rate. So, if your marginal tax rate is 33%, it would be $1000/year. This is because you can write off a maximum of $3000 of losses on your taxes every year.
The information you may find about tax-loss harvesting gains on the internet is usually incorrect if it comes from people trying to sell you something. For example, Betterment / Wealthfront claim that it adds an extra 1% of returns (only if you have a $100,000 portfolio and your marginal tax rate is 33%, which are the assumptions they use to get that number). On the other hand, human investment advisors are generating FUD about tax-loss harvesting[1][2], because they want to discourage people from requesting that service.
[1] http://www.cnbc.com/2014/10/24/weighing-the-pros-and-cons-of...
[2] https://www.kitces.com/blog/is-capital-loss-harvesting-overv...
The information you may find about tax-loss harvesting gains on the internet is usually incorrect if it comes from people trying to sell you something. For example, Betterment / Wealthfront claim that it adds an extra 1% of returns (only if you have a $100,000 portfolio and your marginal tax rate is 33%, which are the assumptions they use to get that number). On the other hand, human investment advisors are generating FUD about tax-loss harvesting[1][2], because they want to discourage people from requesting that service.
[1] http://www.cnbc.com/2014/10/24/weighing-the-pros-and-cons-of...
[2] https://www.kitces.com/blog/is-capital-loss-harvesting-overv...
I feel like the best thing to do is put your money into wealthfront, enjoy the tax loss harvesting and portfolio rebalancing while the portfolio stabilizes and then about 4 months after deposit, transfer your account entirely to vanguard. Wealthfront (under 100k) just uses available index funds as investments anyway.
Can you explain 'tax-loss harvesting'. I'm not familiar with the idea.
Here is a good explanation with examples
https://www.bogleheads.org/wiki/Tax_loss_harvesting
https://www.bogleheads.org/wiki/Tax_loss_harvesting
I've heard it isn't super easy to transfer your account like that. Have you or anyone done so?
I had no problems transferring stocks held in Wealthfront to Fidelity, using an 'in-kind transfer'.
https://support.wealthfront.com/hc/en-us/articles/209353226-...
The securities appeared in my Fidelity account, and the cost basis information populated a few days later. It also doesn't trigger a taxable event, and there were no fees for transferring out of Wealthfront.
https://support.wealthfront.com/hc/en-us/articles/209353226-...
The securities appeared in my Fidelity account, and the cost basis information populated a few days later. It also doesn't trigger a taxable event, and there were no fees for transferring out of Wealthfront.
I transfered my account TO wealthfront and that was easy, now I'm thinking it's time to do what I've described and I'm assuming it's not challenging. Does wealthfront do anything to prevent you from leaving easily?
I've heard the challenge is that since they buy individual stocks, and constantly change the holdings, it isn't easy to keep changing that and you'll be stuck with whatever stocks you had last and can just rebalance within those. I could be making that up though.
That's accurate if you are doing tax optimized direct indexing (https://www.wealthfront.com/tax-optimized-direct-indexing) which doesn't involve just using index funds. Their basic level of service just involves purchasing index funds.
What are you getting out of that at all? Someone doing the balancing math for you?
I guess you could do it yourself if you can do commission free trades in the ETFS they use, but that's a fair amount of work to monitor the market and execute the optimal tax loss harvesting trades (or at least good enough trades to get you to at least 3k) and do the re-balancing math. Wealthfront charges 0.25% a month so I guess it depends on how much you are investing if you think it's not worth it.
0.25% a year FWIW.
0.25% a month would be really really high!
0.25% a month would be really really high!
Ahh yes thanks my mistake, they collect (0.25/12)% each month.
Isn't it actually (1+.0025)^(1/12) - 1, not 0.0025/12?
That makes more sense. They are very close practically speaking but you are correct I believe.
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One reason you might choose a robo over just ETFs is more financial planning information. Both Betterment and Wealthfront offer goal-setting or projection features to help you stay on track for retirement or whatever other savings goals you have. But if you're worried about the fee, check out WiseBanyan (https://wisebanyan.com/), which offers free goal-setting assistance but doesn't have any additional fees on top of the built-in expense ratios.
Disclosure: I work with numbers at WiseBanyan. Our business model charges a la carte for extra services (tax loss harvesting, for example), so you basically pay for what you actually want.
Disclosure: I work with numbers at WiseBanyan. Our business model charges a la carte for extra services (tax loss harvesting, for example), so you basically pay for what you actually want.
If you want more options, you can also move to one of the brokers like TDA. They provide commission free trades for 100 or so ETFs [1], many of which are Vanguards. If you really felt like replicating Wealthfront or Betterment, you can come really close with the commission free ETFs offered. It's all about how much work you want to do on your own.
[1] You must stay invested for 30 days.
[1] You must stay invested for 30 days.
I've always wondered if there is a difference between the ETF version of the Vanguard funds and going directly to Vanguard. For the few I looked at it seemed like the ETFs had lower expense ratios and no minimum funding requirements.
The ETF expense ratios are lower, but you'll pay a couple basis points of spread to buy and another couple basis points to sell[1].
If you have enough money (typically $10k) to invest, then you can buy the Admiral Shares of the mutual fund, which has the same expense ratio as the ETF, but won't require you to pay a bid-ask spread to buy or sell.
If you start with the Investor Shares and end up with more than $10k in the fund eventually, you can always convert them up to Admiral Shares without tax implications. You can't convert ETF to Admiral Shares without selling though.
If you don't think you'll have $10k in the fund anytime soon, then the ETF is likely the cheaper option. However, the difference is practically really small - for a $9000 investment, you'll pay $4.50 per year in expenses for the VTI ETF vs. $14.40 for the VTSMX fund.
[1] https://advisors.vanguard.com/VGApp/iip/site/advisor/investm...
If you have enough money (typically $10k) to invest, then you can buy the Admiral Shares of the mutual fund, which has the same expense ratio as the ETF, but won't require you to pay a bid-ask spread to buy or sell.
If you start with the Investor Shares and end up with more than $10k in the fund eventually, you can always convert them up to Admiral Shares without tax implications. You can't convert ETF to Admiral Shares without selling though.
If you don't think you'll have $10k in the fund anytime soon, then the ETF is likely the cheaper option. However, the difference is practically really small - for a $9000 investment, you'll pay $4.50 per year in expenses for the VTI ETF vs. $14.40 for the VTSMX fund.
[1] https://advisors.vanguard.com/VGApp/iip/site/advisor/investm...
I worked as a vendor to money managers for many years (Vanguard was one of our bigger customers) and am familiar with the industry.
The conclusion most of my colleagues have come to is the roboadvisors don't really offer much beyond Vanguard target date funds. The roboadvisors seem to be failing to acquire significant assets.
The conclusion most of my colleagues have come to is the roboadvisors don't really offer much beyond Vanguard target date funds. The roboadvisors seem to be failing to acquire significant assets.
More importantly, with their low fees, they need massive AUM to ever be profitable. There is a reason Personal Capital is making more than WF/BM by analysis I've read.
For certain index funds, Fidelity is now lower than Vanguard. As of a few months ago, their 500 index and total market index funds are 0.045% compared to vanguard at 0.05%.
Not much of a difference, but it was enough to prompt me to shift my auto deposits from one to the other (still have stuff in both).
Not much of a difference, but it was enough to prompt me to shift my auto deposits from one to the other (still have stuff in both).
Since perryh2 mentioned his 401k, I'll point out that you can't necessarily assume too much as far as the respective branding when you're talking about basis points on these funds from the various companies.
The institutional funds that some 401ks carry can be cheaper than what's available to the general public. I'm pretty sure the Vanguard S&P 500 fund in my 401k is at 0.03%. The government employee Thrift Savings Plan's C fund charges 0.029% for an S&P 500 fund, managed by Blackrock, but I don't think you'll get that as a member of the general public. I'm sure you could find Fidelity and other funds in similar situations.
This is all somewhat relevant since those of us in the US can contribute many more tax-free dollars to our 401ks than our IRAs, sadly.
The institutional funds that some 401ks carry can be cheaper than what's available to the general public. I'm pretty sure the Vanguard S&P 500 fund in my 401k is at 0.03%. The government employee Thrift Savings Plan's C fund charges 0.029% for an S&P 500 fund, managed by Blackrock, but I don't think you'll get that as a member of the general public. I'm sure you could find Fidelity and other funds in similar situations.
This is all somewhat relevant since those of us in the US can contribute many more tax-free dollars to our 401ks than our IRAs, sadly.
It's also worth noting that Vanguard's index funds are usually offered to the general public in two share classes: the "Investor" shares, and the "Admiral" shares. The Admiral shares have lower expense ratios, and generally require a $10k minimum investment -- down from something like $50k several years ago.
Some of Vanguard's funds have corresponding ETFs, which hold the exact same investments the funds do, and usually offer the low expense ratio of the Admiral fund shares with no minimum investment.
Some of Vanguard's funds have corresponding ETFs, which hold the exact same investments the funds do, and usually offer the low expense ratio of the Admiral fund shares with no minimum investment.
I like the idea of Wealthfront but I can't imagine why anyone would pay any fee for the service.
Perhaps that's why Schwab has a fee free robo advisor, and surely every other brokerage and bank is working on the same thing.
Perhaps that's why Schwab has a fee free robo advisor, and surely every other brokerage and bank is working on the same thing.
I think it probably depends on how much you stand to gain from automated tax-loss harvesting: If you don't have the time/skills to do it yourself, strategically selling depreciated stocks (then, potentially, buying them again later) can cancel out a lot of the taxes you'd pay on gains elsewhere in your portfolio. If the Wealthfront fee is less than you save, seems like it'd make sense.
OK, but don't you think the same service will be offered fee-free from robo advisors from big banks and brokerages? That's my guess, anyway.
Brokerages with no flat fees like to charge you per-trade, and Schwab requires you to keep some of your contributions in cash so they can skim off the interest. They've all got to make money somehow.
I'm guessing the dedicated robo-advisors will end up being the cheapest services, since they're online only and don't need to keep all those bank buildings and old guys in suits around.
I'm guessing the dedicated robo-advisors will end up being the cheapest services, since they're online only and don't need to keep all those bank buildings and old guys in suits around.
The typical discount broker customer isn't a Robo customer -- they're fishing for people who give some dope in a suit 1% of their assets every year for generic advice and a shoulder to cry on.
I think the calculus for many people, is: i could do this myself pretty easily, but I'd rather pay $200-400/year per $100k not have to do anything than spend X hrs a month dealing with it...
[deleted]
Fun fact: Save 70% of your income and use it to buy ticker VOO (Vanguard's S&P 500 fund) and you can retire in under 10 years
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
But first you'll need to invent a time machine to start investing in a period when the S&P didn't have a whopping 25x P/E. And then you'll need to find a way to intervene in central banks and global markets so that a 4% withdrawal rate is sustainable in the new era of ZIRP and NIRP where projected future returns for nearly all asset classes are close to nothing and often negative after inflation. Good luck!
> Save 70% of your income
Oh, is that all?! ;)
Oh, is that all?! ;)
And if the S&P drops like it did in 1987, 2000, 2008, then what...?
Then just wait for a few years and it will recover again.
https://www.google.com/finance?q=INDEXSP:.INX
Who will pay the bills in the meantime?
Just run your projections through http://www.firecalc.com/index.php and project what your historical odds of going bust are.
I always tell anyone thinking about retirement: buy a safe annuity that will cover all your income needs before you retire. That way you will never outlive the money you need to survive. You can [probably should!] keep the rest of your money in more aggressive investments, but since you don't know how long you will live you should insure that you will have enough to live on for the rest of your life. If you can't afford such an annuity you can't afford to retire.
... if the market does well ...
Several of the comments seem confused about why the process isn't entirely straightforward. Here's an example:
Say I have $100 mn under management at an index fund.
When the markets close on Thursday, I have a 5 mn weighting in Apple and its market capitalisation is equal to 5% of the S & P 500 index.
On Friday morning, Tim Cooke makes an inspiring speech about the iCar and Apple's market cap rises to 8% of of the S & P index.
I want to sell some of my other positions and buy Apple so that I still have a balanced weighting of S & P 500 shares. However, I face a tradeoff.
If I do this in small bursts over the course of the day, I have a higher administrative burden. I also risk running up bigger transaction fees if Elon Musk makes another speech in the afternoon unveiling the Tesla-phone, forcing me to sell again after Apple falls back down to 5%.
If I wait until 3.59 to place a massive sell order for all my other stocks and buy order for Apple, (a) market participants might think I know something about Apple, causing the price to rise yet further as I struggle to complete my order (b) sneaky traders could buy up Apple Stock at 3.55 and then sell to me at 3.59 for a higher price.
This is the balancing act a passive fund manager faces.
Edit:
As comments point out, this example is incorrect. First example should say something like Apple splitting into Apple and iPhone and then the relative prices changing after the split. The second half still makes sense.
Say I have $100 mn under management at an index fund.
When the markets close on Thursday, I have a 5 mn weighting in Apple and its market capitalisation is equal to 5% of the S & P 500 index.
On Friday morning, Tim Cooke makes an inspiring speech about the iCar and Apple's market cap rises to 8% of of the S & P index.
I want to sell some of my other positions and buy Apple so that I still have a balanced weighting of S & P 500 shares. However, I face a tradeoff.
If I do this in small bursts over the course of the day, I have a higher administrative burden. I also risk running up bigger transaction fees if Elon Musk makes another speech in the afternoon unveiling the Tesla-phone, forcing me to sell again after Apple falls back down to 5%.
If I wait until 3.59 to place a massive sell order for all my other stocks and buy order for Apple, (a) market participants might think I know something about Apple, causing the price to rise yet further as I struggle to complete my order (b) sneaky traders could buy up Apple Stock at 3.55 and then sell to me at 3.59 for a higher price.
This is the balancing act a passive fund manager faces.
Edit:
As comments point out, this example is incorrect. First example should say something like Apple splitting into Apple and iPhone and then the relative prices changing after the split. The second half still makes sense.
This example does not work. If Apple raises from 5% to 8% of the SP500, it also raises from 5% to 8% of your portfolio. No rebalancing is needed when weighting stocks by market cap.
That's correct. A passive index manager is passive - they don't have to worry about some balancing act. It differs from active management because the manager isn't making decisions about which stocks are in the fund. Where the passive fund manager has to do work is on index rebalances and on any constituent corporate action.
[deleted]
If Apple is 5% of the index and it is 5% of your portfolio then you don't have to do anything. If Apple stock goes up and makes 8% of the index, then it's also 8% of your portfolio.
If Apple spins off the iPhone business, your portfolio, like the index, will have both newApple and iphoneCo. If the relative price changes, won't the effect on your portfolio be the same as the effect on the index?
Yeah, its going from bad to worse! Comments on this post have been really helpful in highlighting my ignorance on a topic I thought I understood.
[deleted]
[deleted]
And what happens when nearly everyone indexes?
And when indexing with a bond fund, do you really want to be buying negative yield bonds?
And when indexing with a bond fund, do you really want to be buying negative yield bonds?
If the less informed shareholder move to passive allocations, the market actually gets more efficient:
http://www.philosophicaleconomics.com/2016/05/passiveactive/
Until no one is left doing price discovery. The end state of the indexing craze isn't 100% passive investing, but some equilibrium between active and passive management.
I think at this point we can just ignore the yields on bonds.
The majority of the "income" from government bonds has come from capital gains, not the coupon.
Then the yield decreases it is because the bond itself has become more expensive. Sell the bond at the higher price.
Negative yield is an annual rate.
Taking a short position is more expensive.
Holding a CDS is more expensive.
If you expect negative yields to continue or go deeper, then bonds are a good investment.
Now, if you are in more illiquid corporate bonds, then you may be forced to hold them till maturity.
The majority of the "income" from government bonds has come from capital gains, not the coupon.
Then the yield decreases it is because the bond itself has become more expensive. Sell the bond at the higher price.
Negative yield is an annual rate.
Taking a short position is more expensive.
Holding a CDS is more expensive.
If you expect negative yields to continue or go deeper, then bonds are a good investment.
Now, if you are in more illiquid corporate bonds, then you may be forced to hold them till maturity.
With interest rates on the floor, why would you want any bond index fund?
You're better off putting your bond allocation in high yield savings accounts.
That's the thing about index/robo people that I don't get. The magic formula can do dumb things.
You're better off putting your bond allocation in high yield savings accounts.
That's the thing about index/robo people that I don't get. The magic formula can do dumb things.
Because bond prices move in the opposite direction of equities (generally)? Also, you're not just collecting interest off those bonds since prices move based on the market's interpretation as to where future interest rates are going. I'm sure my explanation sucks, but if the economy starts to improve, the expectation is that rate will go up, so bond prices fall. And the inverse.
Take a look at Vanguard's bond fund (BND). It went from $80.5 to $84 since January 2016. That's a 4.3% return over 8 months and it wasn't because of the interest the bonds pay. It was also at ~$84 back in 2013. As the economy improved the price dropped then went back up again.
Basically, bonds provide a way to diversify to an asset that is not correlated with equities. Investing in bonds reduces your overall return (vs. just equities), but it also reduces the risk level. If you find that sweet spot you can optimize for slightly reduced returns at a much lower risk. This is standard Boglehead theory.
Folks who know more than me can correct my explanation.
Take a look at Vanguard's bond fund (BND). It went from $80.5 to $84 since January 2016. That's a 4.3% return over 8 months and it wasn't because of the interest the bonds pay. It was also at ~$84 back in 2013. As the economy improved the price dropped then went back up again.
Basically, bonds provide a way to diversify to an asset that is not correlated with equities. Investing in bonds reduces your overall return (vs. just equities), but it also reduces the risk level. If you find that sweet spot you can optimize for slightly reduced returns at a much lower risk. This is standard Boglehead theory.
Folks who know more than me can correct my explanation.
One thing a bond fund can offer that a savings account simply cannot is access to TIPS. TIPS bought and held to maturity are about the safest investment there is, and bond funds can capitalize on that (although I'm not sure how great any of the popular TIPS-based funds actually are).
There are other answers to your question, of course, depending on the situation. Munis or treasuries will have different tax advantages and so on, while the money your high (ahem) yield savings account pays will probably be taxable income.
You probably know all this, just thought it worth pointing out that all of this stuff can be used sometimes for a good reason...
There are other answers to your question, of course, depending on the situation. Munis or treasuries will have different tax advantages and so on, while the money your high (ahem) yield savings account pays will probably be taxable income.
You probably know all this, just thought it worth pointing out that all of this stuff can be used sometimes for a good reason...
This is the beauty of the markets. If everyone indexes then this will create arbitrage opportunities for the active manager. People will chase the opportunities - and the cycle continues.
I really look forward to the day when it's easy (and safe) to have API's at places like Vanguard so developers skilled in areas such as UX can layer technology solutions on top of the fantastic investment products provided by outfits like Vanguard.
I don't see much benefit. The investment philosophy that goes along with Vanguard is buy-and-hold for the long term, there's little trading that goes on these accounts. And that's a good thing. It's not like it's difficult to trade stocks as it is, no real need to make it easier.
I'm thinking more about harnessing insight into the returns on the products themselves (and of course not using an API to trade, that wouldn't make much sense with an index fund).
Couldn't agree more. This also applies to other financial technologies as well. In general, I feel there is just too much opaqueness in the finance.
On a slightly related note, I am working on the trading part mentioned in the article - i.e. APIs for advanced methods of getting the trades done. Basically, these trading methods are use machine learning to predict near future movement and use that to optimize the orders. (Some more details here - https://www.qleap.co/ - in case, someone is interested.)
On a slightly related note, I am working on the trading part mentioned in the article - i.e. APIs for advanced methods of getting the trades done. Basically, these trading methods are use machine learning to predict near future movement and use that to optimize the orders. (Some more details here - https://www.qleap.co/ - in case, someone is interested.)
I don't see why youd need to have any sort of website/outward facing material for this. If you can really do what it says on your about page, then just trade!
O’Reilly [..] came to the U.S. in 1983 to attend Villanova University
on a track scholarship. As a junior, he ran the mile in less than four minutes
—a feat he repeated six times. He led Villanova to a conference championship
and represented Ireland at the 1988 Summer Olympics in Seoul.
A few years later, O’Reilly joined Vanguard.