Another important takeaway from this observation is that there is no point in rebalancing a portfolio of stocks with any regularity, which makes hand-made stock portfolios almost as efficient (in hassle and expenses) as index ETFs. Rebalancing is only useful to keep it reasonably diversified and to get rid of stocks that risk reduced liquidity. This is how index ETFs fall short of the mark of what makes them a good idea: a better ETF should stop following a distribution of an index and only use an index as a catalogue of liquid stocks. Given how low TERs get in large funds, this doesn’t really matter, and accountability/regulation is easier with keeping to the distribution from an index, but smaller funds could get lower TERs by following this strategy while retaining all benefits (except the crucial marketing benefit of being able to demonstrate how its performance keeps up with an index). For the same reason, cap weighted index ETFs are worse by being less diversified (which actually makes some index ETFs that hold a lot of stocks a bad choice), while equal-weight ETFs are worse by rebalancing all the time (to the point where they can’t get a low TER at all).
Aside from that, a very low TER index (that’s not too unbalanced due to cap-weighting) is more diversified than a hand-made portfolio with 30 stocks, without losing expected money, so one can use a bit more leverage with it to get a similar risk profile with a bit more expected money (leveraged ETFs are hard to judge, but one could make a portfolio that holds some non-leveraged index ETFs in a role similar to bonds in a conservative allocation, i.e. as lower-risk part, and some self-contained leveraged things in the rest of it).
There might also be tax benefits to how an index handles dividends, getting more expected money than the same stocks (not sure if this happens in the US, or how it depends on tax brackets). Similarly, stocks that pay no dividends might be better for a hand-made portfolio (and there is less hassle with receiving/reinvesting dividends or having to personally declare taxes for them if they are not automatically withheld higher in the chain in your jurisdiction).
you could beat an index fund
(Replying to the phrase, not its apparent meaning in context.) All liquid stocks give the same expected money as each other, and the same as all indices composed of them. Different distributions of stocks will have different actual outcomes, some greater than others. So of course one can beat an index in an actual outcome (this will happen exactly half the time). A single leveraged stock gives more expected money than any non-leveraged index fund (or any non-leveraged stock), yet makes a very poor investment, which illustrates that beating an index in expectation is also not what anyone’s after.
Another important takeaway from this observation is that there is no point in rebalancing a portfolio of stocks with any regularity, which makes hand-made stock portfolios almost as efficient (in hassle and expenses) as index ETFs. Rebalancing is only useful to keep it reasonably diversified and to get rid of stocks that risk reduced liquidity. This is how index ETFs fall short of the mark of what makes them a good idea: a better ETF should stop following a distribution of an index and only use an index as a catalogue of liquid stocks. Given how low TERs get in large funds, this doesn’t really matter, and accountability/regulation is easier with keeping to the distribution from an index, but smaller funds could get lower TERs by following this strategy while retaining all benefits (except the crucial marketing benefit of being able to demonstrate how its performance keeps up with an index). For the same reason, cap weighted index ETFs are worse by being less diversified (which actually makes some index ETFs that hold a lot of stocks a bad choice), while equal-weight ETFs are worse by rebalancing all the time (to the point where they can’t get a low TER at all).
Aside from that, a very low TER index (that’s not too unbalanced due to cap-weighting) is more diversified than a hand-made portfolio with 30 stocks, without losing expected money, so one can use a bit more leverage with it to get a similar risk profile with a bit more expected money (leveraged ETFs are hard to judge, but one could make a portfolio that holds some non-leveraged index ETFs in a role similar to bonds in a conservative allocation, i.e. as lower-risk part, and some self-contained leveraged things in the rest of it).
There might also be tax benefits to how an index handles dividends, getting more expected money than the same stocks (not sure if this happens in the US, or how it depends on tax brackets). Similarly, stocks that pay no dividends might be better for a hand-made portfolio (and there is less hassle with receiving/reinvesting dividends or having to personally declare taxes for them if they are not automatically withheld higher in the chain in your jurisdiction).
(Replying to the phrase, not its apparent meaning in context.) All liquid stocks give the same expected money as each other, and the same as all indices composed of them. Different distributions of stocks will have different actual outcomes, some greater than others. So of course one can beat an index in an actual outcome (this will happen exactly half the time). A single leveraged stock gives more expected money than any non-leveraged index fund (or any non-leveraged stock), yet makes a very poor investment, which illustrates that beating an index in expectation is also not what anyone’s after.