The Lemon Fool

I would recommend this book particularly for those who are dedicated to index funds but in general I would imagine that most would enjoy it. Written by Robin Wigglesworth, apparently Global Finance Correspondent of the FT, no less. He writes about the development of the index fund by of course Jack Bogle (and others), and how Vanguard came to be the name of his funds.

Clearly written by a journalist, it is a great read!

Dod

The Wiki entry for John Bogle gives an interesting summary of his life
https://en.wikipedia.org/wiki/John_C._Bogle

Dod101 wrote:I would recommend this book particularly for those who are dedicated to index funds but in general I would imagine that most would enjoy it. Written by Robin Wigglesworth, apparently Global Finance Correspondent of the FT, no less. He writes about the development of the index fund by of course Jack Bogle (and others), and how Vanguard came to be the name of his funds.

Clearly written by a journalist, it is a great read!

Bogle is widely attributed to be the founder of index funds, and is often referred to as the "father of index funds". But he really only created the first retail index fund, in 1975.

Four years prior to that in 1971, folks at Wells Fargo started an index fund for institutions, based on prior research at the University of Chicago. Whilst in 1973 the book "A random walk down Wall Street" became very popular, expressing similar ideas.

Wells Fargo then formed a joint partnership with Nikko Securities to market index funds institutionally. That company was purchased by Barclays Bank in the mid 1990s, which led to the formation of Barclays Global Investors (BGI), which launched the iShares series of ETFs (although not the first ETF, iShares popularised them).

BGI was then bought by Blackrock who currently offer iShares.

So if I were awarding index fund Oscars, I would award them equally to Bogle/Vanguard and Wells Fargo.

Lootman wrote:

Dod101 wrote:I would recommend this book particularly for those who are dedicated to index funds but in general I would imagine that most would enjoy it. Written by Robin Wigglesworth, apparently Global Finance Correspondent of the FT, no less. He writes about the development of the index fund by of course Jack Bogle (and others), and how Vanguard came to be the name of his funds.

Clearly written by a journalist, it is a great read!

Bogle is widely attributed to be the founder of index funds, and is often referred to as the "father of index funds". But he really only created the first retail index fund, in 1975.

Four years prior to that in 1971, folks at Wells Fargo started an index fund for institutions, based on prior research at the University of Chicago. Whilst in 1973 the book "A random walk down Wall Street" became very popular, expressing similar ideas.

Wells Fargo then formed a joint partnership with Nikko Securities to market index funds institutionally. That company was purchased by Barclays Bank in the mid 1990s, which led to the formation of Barclays Global Investors (BGI), which launched the iShares series of ETFs (although not the first ETF, iShares popularised them).

BGI was then bought by Blackrock who currently offer iShares.

So if I were awarding index fund Oscars, I would award them equally to Bogle/Vanguard and Wells Fargo.

All of this is covered in the book as well as the fact that Bogle started off working for Wellington in Boston, Mass, as in 'Duke of Wellington' and from there came the name Vanguard. But many more than Bogle feature in the book and it makes for a good read.

Dod

Late on in the book there is a discussion on the effect of index investing and on the role of indexes (indices?) in general. For example, the author tells us, the S & P Dow Jones indices' committee suddenly caused Tesla to become worth hundreds of billions of dollars more, in the course of last year. All it had to do was announce that Tesla would be included in its index because of course index funds had to slavishly follow their index and buy whether Tesla was a good investment or not. The index funds have delegated their investment decisions to the companies that create the benchmarks. You could even say that they are active managers.

It goes on to discuss the often not so benign influence that index investing has on the investment world in general. Very interesting and quite thought provoking to me.

Dod

Dod101 wrote:Late on in the book there is a discussion on the effect of index investing and on the role of indexes (indices?) in general. For example, the author tells us, the S & P Dow Jones indices' committee suddenly caused Tesla to become worth hundreds of billions of dollars more, in the course of last year. All it had to do was announce that Tesla would be included in its index because of course index funds had to slavishly follow their index and buy whether Tesla was a good investment or not. The index funds have delegated their investment decisions to the companies that create the benchmarks. You could even say that they are active managers.

It goes on to discuss the often not so benign influence that index investing has on the investment world in general. Very interesting and quite thought provoking to me.

That is a peculiarity of the S&P 500. A company has to be profitable to be included in that index. Tesla became a very big company without making a profit, so it was excluded. When it did make a profit, it had to be included. The S&P 500 trackers then had to buy it, and the increased demand for Tesla shares drove the price up.

A pure market weighted tracker does not have that problem. Nonetheless, a similar problem occurs if the smallest companies are not included in the index. When they become large enough to be included, their price is likely to jump. Active investors can try to front run that by buying the shares just before they become big enough to enter the index, and selling them if they do. Index funds can avoid that by including even the smallest companies, but is not be worthwhile because of the added costs.

GeoffF100 wrote:

Dod101 wrote:Late on in the book there is a discussion on the effect of index investing and on the role of indexes (indices?) in general. For example, the author tells us, the S & P Dow Jones indices' committee suddenly caused Tesla to become worth hundreds of billions of dollars more, in the course of last year. All it had to do was announce that Tesla would be included in its index because of course index funds had to slavishly follow their index and buy whether Tesla was a good investment or not. The index funds have delegated their investment decisions to the companies that create the benchmarks. You could even say that they are active managers.

It goes on to discuss the often not so benign influence that index investing has on the investment world in general. Very interesting and quite thought provoking to me.

That is a peculiarity of the S&P 500. A company has to be profitable to be included in that index. Tesla became a very big company without making a profit, so it was excluded. When it did make a profit, it had to be included. The S&P 500 trackers then had to buy it, and the increased demand for Tesla shares drove the price up.

A pure market weighted tracker does not have that problem. Nonetheless, a similar problem occurs if the smallest companies are not included in the index. When they become large enough to be included, their price is likely to jump. Active investors can try to front run that by buying the shares just before they become big enough to enter the index, and selling them if they do. Index funds can avoid that by including even the smallest companies, but is not be worthwhile because of the added costs.

Well yes. That is the point the extract was making, that the index funds are delegating their investment decisions to those who create the benchmarks; it does not matter whether the company is big or small, profitable or otherwise, simply that the index includes the company or not. So you can say it is active management by the index compilers, not exactly scientific.

Dod

Dod101 wrote: the index funds are delegating their investment decisions to those who create the benchmarks; it does not matter whether the company is big or small, profitable or otherwise, simply that the index includes the company or not. So you can say it is active management by the index compilers, not exactly scientific.

If that is a concern then the remedy is to choose the widest and broadest of indexes, such as the UK All-Share index or the US Wilshire 5000. The global equivalent could be the MSCI ACWI (All Countries World Index).

https://www.msci.com/our-solutions/indexes/acwi

Because these reflect all the companies in that universe, there is no problem with shares being promoted or relegated between indexes, which at a stroke removes most of the "subjectivity" of the index committee. So with the Tesla example, an All-Share index fund would not have to do anything when it was promoted.

Combine such a broad index with a fund structure like an ETF, which does not suffer from problems caused by subscriptions and redemptions, and you have an index fund that only rarely needs to be in the market at all. It essentially self-adjusts to moving prices. Some I have seen have an annual turnover of 1% or so, which is trivial.

Lootman wrote:

Dod101 wrote: the index funds are delegating their investment decisions to those who create the benchmarks; it does not matter whether the company is big or small, profitable or otherwise, simply that the index includes the company or not. So you can say it is active management by the index compilers, not exactly scientific.

If that is a concern then the remedy is to choose the widest and broadest of indexes, such as the UK All-Share index or the US Wilshire 5000. The global equivalent could be the MSCI ACWI (All Countries World Index).

https://www.msci.com/our-solutions/indexes/acwi

Because these reflect all the companies in that universe, there is no problem with shares being promoted or relegated between indexes, which at a stroke removes most of the "subjectivity" of the index committee. So with the Tesla example, an All-Share index fund would not have to do anything when it was promoted.

Combine such a broad index with a fund structure like an ETF, which does not suffer from problems caused by subscriptions and redemptions, and you have an index fund that only rarely needs to be in the market at all. It essentially self-adjusts to moving prices. Some I have seen have an annual turnover of 1% or so, which is trivial.

Until I had read the book, Trillions, I had not given much thought to index investing but following those specific indices clearly causes the problems that I have mentioned. Your point seems a good one but from what I have read those promoting index investing are getting ever more specific in the index they are tracking, making the problem worse not better.

Dod

Lootman wrote:

Dod101 wrote: the index funds are delegating their investment decisions to those who create the benchmarks; it does not matter whether the company is big or small, profitable or otherwise, simply that the index includes the company or not. So you can say it is active management by the index compilers, not exactly scientific.

If that is a concern then the remedy is to choose the widest and broadest of indexes, such as the UK All-Share index or the US Wilshire 5000. The global equivalent could be the MSCI ACWI (All Countries World Index).

https://www.msci.com/our-solutions/indexes/acwi

Because these reflect all the companies in that universe, there is no problem with shares being promoted or relegated between indexes, which at a stroke removes most of the "subjectivity" of the index committee. So with the Tesla example, an All-Share index fund would not have to do anything when it was promoted.

Combine such a broad index with a fund structure like an ETF, which does not suffer from problems caused by subscriptions and redemptions, and you have an index fund that only rarely needs to be in the market at all. It essentially self-adjusts to moving prices. Some I have seen have an annual turnover of 1% or so, which is trivial.

The MSCI All-World index contains only what we would call large caps. The FTSE All-World Index contains more stocks. The UK component of that index is the FTSE 100 essentially. The Global All-Cap Index should also contains what we call medium caps. With ETFs, the Authorised Participants have to trade baskets of all the shares in the index. Vanguard UK, uses FTSE rather than All-Cap indexes for its ETFs. There has long been talk of abandoning the index providers and compiling the indexes themselves to save money, but that has not happened, yet at least.

I would not buy an S&P 500 tracker, for the reasons identified. Warren Buffet favours it over a whole market tracker, but what does he know?