Author Topic: Index Funds are Getting Reaped Off  (Read 4296 times)

AM43

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James

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Re: Index Funds are Getting Reaped Off
« Reply #1 on: July 07, 2015, 07:00:52 AM »
"passive funds that buy the entire market can minimize the damage of front-running. By owning almost every stock, there’s barely anything for arbitragers to buy first."

That is one reason I own the entire index, but not the only reason. S&P index is fine, I don't think the problem is as big as these guys suggest, but it does make me feel better about being in the full index.

Also from the article "Managers at Vanguard Group, which oversees $3 trillion, “mitigate a good portion” of the risk by gradually building positions over time in stocks that are scheduled to be added, said Doug Yones, the Valley Forge, Pennsylvania-based firm’s head of domestic equity indexing and ETF product management."

I highly suspect that most of the "losses" are by firms who don't give a damn about their investors.
« Last Edit: July 07, 2015, 07:02:39 AM by James »

DrF

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Re: Index Funds are Getting Reaped Off
« Reply #2 on: July 07, 2015, 08:20:51 AM »
In the article it also talks about how the front-runners are increasing liquidity. They buy up millions of shares of a company that is about to be added to the S&P500 over weeks. This buildup does raise the share price of the stock, but I don't think nearly as much as if on a single day huge index funds try and buy those same shares.

Market makers do play a fundamental role in the modern stock market. They profit through shear volume. The SEC watches these guys to make sure they don't get out of hand.

http://www.usatoday.com/story/money/business/2014/10/16/sec-fines-athena-capital-research/17367739/

Scandium

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Re: Index Funds are Getting Reaped Off
« Reply #3 on: July 07, 2015, 09:48:17 AM »
So:

Quote
"A study in 2008 by Antti Petajisto, now a money manager at BlackRock Inc., estimated the impact could boost the expense of owning an index fund by as much as 0.28 percentage points.
On top of 0.11% = 0.39%. And the vanguard S&P fund is only 0.05% btw.

Quote
By comparison, actively managed stock funds charge an average 0.86 percent annually, data compiled by Investment Company Institute show."
I thought it was still over 1%?

So, it's still cheaper than an active fund! And you are guarantied to track the market, rather than a 50% chance on underperforming in a given year? I don't see a huge problem here.

As others mention the total market fund avoids this anyway. And vanguard have methods to minimize it as well. We only have S&P and extended market in our 401k, not total market, but I'm not too worried about it.

protostache

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Re: Index Funds are Getting Reaped Off
« Reply #4 on: July 07, 2015, 10:07:59 AM »
What kinds of strategies are people using to exploit this? Is it just a simple covered call? I suppose the trick is to figure out what companies are going to get included (or dropped) before the other guy does.

hodedofome

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Re: Index Funds are Getting Reaped Off
« Reply #5 on: July 07, 2015, 10:18:48 AM »
There's a lot of index funds out there that publicly give the methodology they use to select stocks, as well as the dates they rebalance. It's not too hard for a few good traders to figure out what they are going to buy and sell, and when.

forummm

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Re: Index Funds are Getting Reaped Off
« Reply #6 on: July 07, 2015, 01:05:45 PM »
Seemed relevant: http://www.vanguard.com/pdf/FCPZRT.pdf

They mention how the transition is being done to avoid front running.

slugline

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Re: Index Funds are Getting Reaped Off
« Reply #7 on: July 07, 2015, 01:35:30 PM »
This is one reason why having low turnover is a good attribute for index funds. It keeps a lid on the damage that the front-runners can inflict.

Proud Foot

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Re: Index Funds are Getting Reaped Off
« Reply #8 on: July 07, 2015, 01:51:51 PM »
This sounds like it could be an interesting hobby to try out with a small amount of money. S&P announced yesterday (July 6) they were adding Advanced Auto Parts (AAP) to the S&P500 on July 8. I think I will keep an eye on it to see what happens. It closed the 6th at 163.42 up $1.31 from close at 7/2.  Might be highly speculative since they closed at $164.28 on 6/28 but dropped to $158.93 close on 6/29.

DrF

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Re: Index Funds are Getting Reaped Off
« Reply #9 on: July 07, 2015, 02:07:39 PM »
The money here is in the slight bump the stock gets while being acquired by the big index companies. This is a play mostly/only for high frequency trading firms. They buy a shitload of the stock right before the index companies do, then sell it a few milliseconds later for a tiny fraction more. You do this enough times with enough shares, and you get millions in profits.

I don't think this is a good idea for Joe Shmoe trying to buy $5000 worth of stock in hopes that just by it getting onto the S&P500 it will give them a better profit.

Do you like that new company? Is it a solid investment? Would you buy it if it weren't being added?

dungoofed

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Re: Index Funds are Getting Reaped Off
« Reply #10 on: July 07, 2015, 05:19:28 PM »