Interesting article about "extra expenses" associated with index funds

[ender]

http://www.bloomberg.com/news/articles/2015-07-07/the-hugely-profitable-wholly-legal-way-to-game-the-stock-market

Interesting article. I'm not sure if I should put it in investor alley or anti-mustachian forum. It is an interesting perspective that at surface level appears plausible, but then it somehow makes it seem like index funds are a terrible buy even though if everything the article says is true, they are still cheaper by about 60% on average.

[a1smith]

Yes, interesting article.

A couple of thoughts - a lot of people ask OP's for details of their active investing strategies when people talk about active investing - well, here is a good example of front running stocks that are being added to indexes.

Also, I think there is too much focus on expense ratio.  Expense ratio is not what makes your balance go up, it is total return.  Sure, a higher ER makes the fund work harder to get the same return as a fund with lower ER but there are actively managed funds that do it on a consistent basis; one example being FGCKX.  So, sure, look at ER but make sure you compare total returns also.

PS - Yes, I've read many posts here and articles elsewhere discussing passive index vs actively managed; that what is top 25% one year won't be next year, etc.  Just mentioning that to save people having to re-post same info.  I have a mix of both passive and active funds . . .

[MDM]

See also http://forum.mrmoneymustache.com/investor-alley/index-funds-are-getting-reaped-off/

[Xlar]

See also http://forum.mrmoneymustache.com/investor-alley/index-funds-are-getting-reaped-off/

As mentioned is this other thread, good index funds will participate in the front running and therefore not get impacted.

Vanguard does this: http://www.vanguard.com/pdf/FCPZRT.pdf

[a1smith]

See also http://forum.mrmoneymustache.com/investor-alley/index-funds-are-getting-reaped-off/

As mentioned is this other thread, good index funds will participate in the front running and therefore not get impacted.

Vanguard does this: http://www.vanguard.com/pdf/FCPZRT.pdf

Actually, some index funds will actually outperform the index slightly some years because of this effect.

[Inquisitive1]

G'day,

I spend 6 years at a buy side firm and yes that certainly does happen as coming up to a index rebalance date, just about every broker will send their institutional clients their tips for additions and removals, encouraging trading and thus commissions for them. With cap weighted indices some of the changes are very clear while some are more borderline, some active managers play it through physical stock and some via options.
Index funds are not perfect but some of these things can be managed quite well, the index fund managers need to balance the trade off between large buying/selling around rebalance time with the risk of increased tracking errors if they don't trade around rebalance time. In my experience many focus on minimising the tracking error.

While a little annoying perhaps I don't think it is a huge worry over the long term.

Cheers,