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The first totally utterly completely free index fund?

Index tracking funds and ETFs
Lootman
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The first totally utterly completely free index fund?

#158608

Postby Lootman » August 10th, 2018, 6:29 pm

You be the judge. But Fidelity US has introduced two zero-cost index funds. There is a 0% expense ratio, no minima and no buy/sell fee. One is a US fund and the other is global.

Zero-fee index funds have been common on the institutional side for 20 years or so. The fund manager makes a crust from stock lending or else that is shared with the client in some way. Now there are retail offerings. For now, only in the US. But fees are coming down here too so if these are successful then who knows?

https://www.fool.com/investing/2018/08/ ... catch.aspx

Cookie
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Re: The first totally utterly completely free index fund?

#165565

Postby Cookie » September 10th, 2018, 9:02 pm

Is there a way of accessing these in the UK?

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Re: The first totally utterly completely free index fund?

#165571

Postby Lanark » September 10th, 2018, 9:38 pm

This is what I dont like about index funds, it is so obvious that someone is making bank on them and its not the customer.

If this fund is using the holdings for stock lending, that means that a bunch of shorts are going to be regularly lowering the value of your stocks.

When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

Pendrainllwyn
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Re: The first totally utterly completely free index fund?

#165590

Postby Pendrainllwyn » September 11th, 2018, 12:21 am

Lanark wrote:This is what I dont like about index funds, it is so obvious that someone is making bank on them and its not the customer.

I think you'll find active fund managers also lend out their stocks.

Lanark wrote:When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

I am not sure where we are on that journey but agree that the greater the percentage of price followers the better the opportunity for the price maker. I used to be 100% in the passive camp but have been increasingly investing in active funds (concentrated, high conviction, bottom up research) for this reason.

Pendrainllwyn

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Re: The first totally utterly completely free index fund?

#165591

Postby Alaric » September 11th, 2018, 12:24 am

Lanark wrote:but I wonder if we are approaching the point where a managed fund might outperform them?


Managed funds have always been able to outperform indexed funds by selecting by luck or otherwise those stocks in the index that do well, or just not investing in stocks in the index. The debate should be whether they were able to do this without increasing "risk", for whatever definition of risk is chosen.

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Re: The first totally utterly completely free index fund?

#165601

Postby Cookie » September 11th, 2018, 7:21 am

So not accessible in uk yet?

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Re: The first totally utterly completely free index fund?

#165604

Postby JohnB » September 11th, 2018, 7:38 am

What I find remarkable is index managers have got to 0.1% and now 0 to run a complicated fund, but we are happy to pay 0.25%+ for the broker to look after a few lines in a database

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Re: The first totally utterly completely free index fund?

#165618

Postby OhNoNotimAgain » September 11th, 2018, 8:57 am

JohnB wrote:What I find remarkable is index managers have got to 0.1% and now 0 to run a complicated fund, but we are happy to pay 0.25%+ for the broker to look after a few lines in a database

And 46bps to the platform
and 100bps to an IFA

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Re: The first totally utterly completely free index fund?

#165634

Postby Lootman » September 11th, 2018, 10:11 am

Cookie wrote:So not accessible in uk yet?

US only at this point, although if your broker deals with US securities then it might be possible to invest in them.

I think the point is more that this is the logical conclusion of the trend of index funds to cost less and less. Eventually I think that beta will be free and you will only pay for (an attempt at) alpha.

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Re: The first totally utterly completely free index fund?

#165742

Postby GeoffF100 » September 11th, 2018, 7:58 pm

Lanark wrote:When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

It dies not work like that. A managed fund can outperform only another fund underperforms, irrespective of the proportion of index trackers. If it were possible to pick the winners with better than chance probability, nobody would invest in the likely losers. The likely winners would than no longer be likely winners, because there would be no likely losers.

tjh290633
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Re: The first totally utterly completely free index fund?

#165761

Postby tjh290633 » September 11th, 2018, 10:59 pm

GeoffF100 wrote:
Lanark wrote:When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

It dies not work like that. A managed fund can outperform only another fund underperforms, irrespective of the proportion of index trackers. If it were possible to pick the winners with better than chance probability, nobody would invest in the likely losers. The likely winners would than no longer be likely winners, because there would be no likely losers.

Why does another fund have to underperform? It might make a similar selection of holdings, of even one that does better.

I think that you are suggesting that only funds invest in the market, and that their universe of holdings is limited to the same holdings.

TJH

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Re: The first totally utterly completely free index fund?

#165771

Postby hiriskpaul » September 12th, 2018, 12:18 am

tjh290633 wrote:
GeoffF100 wrote:
Lanark wrote:When index trackers were a small part of the market they made complete sense, but I wonder if we are approaching the point where a managed fund might outperform them?

It dies not work like that. A managed fund can outperform only another fund underperforms, irrespective of the proportion of index trackers. If it were possible to pick the winners with better than chance probability, nobody would invest in the likely losers. The likely winners would than no longer be likely winners, because there would be no likely losers.

Why does another fund have to underperform? It might make a similar selection of holdings, of even one that does better.

I think that you are suggesting that only funds invest in the market, and that their universe of holdings is limited to the same holdings.

TJH

Strictly speaking all managed funds could outperform, although statistically this is very unlikely. For this to happen the aggregate of all the shares not in actively managed funds must underperform as the total of all shares in managed funds and those not in managed funds performs in line with the market, because that total is the market.

Interesting to see the management charge finally going to zero, but even more interesting to see that Fidelity were first to get there. For many years they were dead against index investing. Running their own index lacks transparency somewhat though. Be interesting to see how their in house indexes do compared to more established providers.

I am not aware of any UK brokers offering US mutual funds - it is difficult to buy US listed ETFS now as well. I think anyone interested would need to open an account with a US broker, which again is very difficult to do these days.

GeoffF100
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Re: The first totally utterly completely free index fund?

#165811

Postby GeoffF100 » September 12th, 2018, 9:29 am

hiriskpaul wrote:Strictly speaking all managed funds could outperform, although statistically this is very unlikely. For this to happen the aggregate of all the shares not in actively managed funds must underperform as the total of all shares in managed funds and those not in managed funds performs in line with the market, because that total is the market..

It is a matter of definition here. I am defining index funds to be market weighted trackers. I am also defining managed funds to be everything else. (My portfolio is a managed fund by that definition.) With these definitions, clearly the index funds track the market. The market weighted average of the managed funds is the market minus a proportion of the market, and therefore also tracks the market. Clearly, there can only be winners if there are losers. As I have said, if it were possible to pick winners with better than chance success, nobody would invest in the others, but then there would be no losers, so there could not be any winners either. Picking winners is futile. If it works, it defeats itself.

hiriskpaul
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Re: The first totally utterly completely free index fund?

#165835

Postby hiriskpaul » September 12th, 2018, 11:17 am

GeoffF100 wrote:
hiriskpaul wrote:Strictly speaking all managed funds could outperform, although statistically this is very unlikely. For this to happen the aggregate of all the shares not in actively managed funds must underperform as the total of all shares in managed funds and those not in managed funds performs in line with the market, because that total is the market..

It is a matter of definition here. I am defining index funds to be market weighted trackers. I am also defining managed funds to be everything else. (My portfolio is a managed fund by that definition.) With these definitions, clearly the index funds track the market. The market weighted average of the managed funds is the market minus a proportion of the market, and therefore also tracks the market. Clearly, there can only be winners if there are losers. As I have said, if it were possible to pick winners with better than chance success, nobody would invest in the others, but then there would be no losers, so there could not be any winners either. Picking winners is futile. If it works, it defeats itself.

By your definition of a fund, I completely agree with your comments. For some "funds" to do better than the market, 1 or more other funds must do worse - simple arithmetic. There are of course many types of fund caught by your definition, ITs/UTs/OEICs, US mutual funds, sovereign wealth funds, pension funds, endowment funds, non-cap weighted index funds/ETFs, hedge funds, etc. Given the diversity, it is possible for a category of these funds to occasionally beat the market. S&P regularly analyse US mutual funds (https://us.spindices.com/spiva/) and occasionally you get a situation where an unusually large set of funds beat their benchmarks. Not often, of course and it does not persist, but one of the reasons is that not all actively managed funds are US mutual funds. As such it would be statistically unlikely for a subset of funds to not occasionally beat the market. It just means some other "funds" not being considered have done worse than the market.

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Re: The first totally utterly completely free index fund?

#165836

Postby hiriskpaul » September 12th, 2018, 11:19 am

GeoffF100 wrote:
hiriskpaul wrote:Strictly speaking all managed funds could outperform, although statistically this is very unlikely. For this to happen the aggregate of all the shares not in actively managed funds must underperform as the total of all shares in managed funds and those not in managed funds performs in line with the market, because that total is the market..

It is a matter of definition here. I am defining index funds to be market weighted trackers. I am also defining managed funds to be everything else. (My portfolio is a managed fund by that definition.) With these definitions, clearly the index funds track the market. The market weighted average of the managed funds is the market minus a proportion of the market, and therefore also tracks the market. Clearly, there can only be winners if there are losers. As I have said, if it were possible to pick winners with better than chance success, nobody would invest in the others, but then there would be no losers, so there could not be any winners either. Picking winners is futile. If it works, it defeats itself.

By your definition of a fund, I completely agree with your comments. For some "funds" to do better than the market, 1 or more other funds must do worse - simple arithmetic. There are of course many types of fund caught by your definition, ITs/UTs/OEICs, US mutual funds, sovereign wealth funds, pension funds, endowment funds, non-cap weighted index funds/ETFs, hedge funds, etc. Given the diversity, it is possible for a category of these funds to occasionally beat the market. S&P regularly analyse US mutual funds (https://us.spindices.com/spiva/) and occasionally you get a situation where an unusually large set of funds beat their benchmarks. Not often, of course and it does not persist, but one of the reasons is that not all actively managed funds are US mutual funds. As such it would be statistically unlikely for a subset of funds to not occasionally beat the market. It just means some other "funds" not being considered have done worse than the market.

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Re: The first totally utterly completely free index fund?

#165877

Postby tjh290633 » September 12th, 2018, 1:25 pm

I think that you guys are missing the point as far as managed funds are concerned. They do not have to invest in every share in their universe, nor do they have to follow market weighting.

If you take the shares in the FTSE350, for example, over the course of the year some shares will do better and some worse than the index itself. It only requires active fund managers to pick more of the better ones, and to weight their holdings differently, for them to outperform. They tend not to do this, of course, because of their sheep-like behaviour. There is no statistical reason for it, just their behaviour.

TJH

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Re: The first totally utterly completely free index fund?

#165922

Postby GeoffF100 » September 12th, 2018, 4:11 pm

tjh290633 wrote:If you take the shares in the FTSE350, for example, over the course of the year some shares will do better and some worse than the index itself. It only requires active fund managers to pick more of the better ones, and to weight their holdings differently, for them to outperform.

The problem is that there is no convincing evidence that anyone can do this with better than chance success. Some do succeed, but nobody has found a way of predicting which ones will succeed in advance with better than chance success.

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Re: The first totally utterly completely free index fund?

#165965

Postby JohnB » September 12th, 2018, 6:29 pm

Well Buffet can, and so can a few other people. But I know I can’t, and don’t have an idea how to pick the clever people either. I wonder how big the fraction of the market is for inherited, or ignored private holdings is. Pretty small I guess, so active means all but indexes. If what I can do is understand tax and fees, I should aim to minimise them, so index funds in SIPPs and ISAs for me

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Re: The first totally utterly completely free index fund?

#165969

Postby GeoffF100 » September 12th, 2018, 6:45 pm

JohnB wrote:Well Buffet can, and so can a few other people.

Buffet did, but that is in the past. "Can" is in the future. He had underperformed the index for ten years when I last looked.

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Re: The first totally utterly completely free index fund?

#165973

Postby JohnB » September 12th, 2018, 7:49 pm

Perhaps, at age 78, and just becoming the richest person in the world, he decided to let others have a go!


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