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even the index funds have their choices selected by managers. starting at the top managment decides what stocks go in an index and how long they are kept.
on a fund level you have the individual index funds deciding what to buy. a total market fund does not buy all 5000 stocks. they buy samples.
then you have different fee structures and different index's to chose from.
even the index funds have their choices selected by managers. starting at the top managment decides what stocks go in an index and how long they are kept.
Perhaps we're not thinking about the same indexes.
The very basic ones-S&P 500, S&P 400, NASDAQ 100, Wilshire 5000, Nikkei 225, etc., etc. have very, very cut and dried rules about what stocks comprise the index.
Fund managers do no selection in index funds or ETFs based on these indexes. The stocks are chosen based on what stocks comprise the index-typically done by actual valuation, and recomputed daily. If a fund manager likes a company that drops from the top 500 to the top 600, he doesn't get to arbitrarily say, 'well, I'll just say it's part of the S&P 500'. Conversely, if he hates a company that goes to #475, he doesn't get to say 'well, I will just skip that company'.
The list is completely independent of that manager's judgment. That is part of why true index funds have such incredibly low fees-it is not too hard to punch up a list and buy/sell once a day.
the stocks admitted , subtracted or changed in the index are chosen by the directors of the index itself just like fund managers do.. someone had to say okay lets remove gm when it was failing at some point , if they waited to long they made a poor choice ,which they did just that and sat with a bunch of failing companies way to long ...
the dow has only a few origonal stocks left , as companies failed or no longer represented what they wanted it to new ones are added and subtracted all the time. the dow stocks were changed 53x since the index started by its directors as they PICKED other stocks to replace or add to the origonal holdings , sounds like a fund manager to me..
when it comes to the funds themselves a total market fund does not buy all 5000 stocks. they buy the heavy hitters that count the most and buy representive stocks for the rest omitting some and picking others. each total market index fund has different holdings after the s&p 500 ones
the point is there are folks making good and bad decisions as to what make up that index fund.
Last edited by mathjak107; 10-13-2014 at 02:44 AM..
Trying to compare the index portfolio of a person who spends little time or thought on which funds to include in their portfolio with someone who spends time and thought on constructing an active portfolio might not be a fair comparison. It is ok to have multiple diverse portfolios over several fund families. Bogleheads often do.
It still all amounts to some humans making the decision as to what to or not include no matter what the level.
it isn't a robotically made decision as some think nor are index funds from family to family even holding the same stocks.
what index you pick and who's can be just as important a criteria.
The last line is so very important as index funds can now come with load and management fees. Enhanced index funds attempt to beat the index they are pegged to without buying the complete index as weighted but by fine tuning within the index. Time will tell about them. Their fees are a little higher.
Anyone wanting to seriously invest in index funds needs to do either one of the following and preferably both.
A. Follow the Boglehead forum
B. Read Jack Bogle and others.
Do index funds meet the needs of an investor? What is an investors risk tolerance? How active does an investor want to be in managing their investment portfolio?
I hope you find your own personal answers to these questions. It is always better to make investment decisions based on data and facts rather than on opinions. Remember, it's your money your talking about.
the stocks admitted , subtracted or changed in the index are chosen by the directors of the index itself just like fund managers do.. someone had to say okay lets remove gm when it was failing at some point , if they waited to long they made a poor choice ,which they did just that and sat with a bunch of failing companies way to long ...
the dow has only a few origonal stocks left , as companies failed or no longer represented what they wanted it to new ones are added and subtracted all the time. the dow stocks were changed 53x since the index started by its directors as they PICKED other stocks to replace or add to the origonal holdings , sounds like a fund manager to me..
when it comes to the funds themselves a total market fund does not buy all 5000 stocks. they buy the heavy hitters that count the most and buy representive stocks for the rest omitting some and picking others. each total market index fund has different holdings after the s&p 500 ones
the point is there are folks making good and bad decisions as to what make up that index fund.
Respectfully disagree.
I specifically left off Dow, because that IS somewhat arbitrary.
Most of the true 'indexes', that attempt to track to a specific portion of the market, are not subject to human judgement.
S&P 500 is absolutely not arbitrary. It is the largest 500 stocks in the US, listed on NYSE or NASDAQ, by total market capitalization.
NASDAQ 100 is the largest 100 non-financial companies on the NASDAQ, by total market capitalization.
Russell 3000 is the largest 3000 stocks in the US, listed on NYSE or NASDAQ, by total market capitalization.
MSCI EAFE is the largest 70% of the stocks from 21 developed markets, excluding the US and Canada (Austria, Belgium, Denmark, Finland, France, etc., etc.)
FTSE China 200 is the top 200 Chinese companies listed on the Shanghai and Shenzhen stock indexes.
These kinds of indexes have set rules. Following those rules, that's not arbitrary, and that's not chosen by a human on a whim, nor is it subject to adjustment on a whim. When an index changes its component methodology, that change is publicly available.
An index fund that actually follows the index it purports to represent DOES buy all the stocks in that index in the appropriate proportions. Some massive ones 'sample' to gain representation, but I don't buy those any more than I buy a 'dogs of the dow' index.
It still all amounts to some humans making the decision as to what to or not include no matter what the level.
it isn't a robotically made decision as some think nor are index funds from family to family even holding the same stocks.
what index you pick and who's can be just as important a criteria.
if essentially somebody is doing the picking as you say, then why are index funds less costly to administer? and yet perform, consistently, as well as manged funds, sometimes better.
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