Do index funds, in practice, actually get returns that match the numbers people quote when they say “The S&P 500 returned X% over this time period”? After all, index funds have to actually go out and buy the stocks that are listed on stock indexes, which makes them subject to transaction costs, temporary fluctuations in supply and demand, and other issues that can cut into their returns. There are enough index funds that the mere fact of being chosen to be listed on an index can cause a stock’s price to rise as index funds run out and buy the stock, and my brother’s job at Goldman Sachs largely consists of finding ways to make money by exploiting the way market prices change in response to trades that index funds have to make. All this makes me suspicious that there might be a big difference between the returns earned by “The S&P 500″ and by “Giant Bank’s S&P 500 Index Fund.”
According to Morningstar data, last year the average S&P 500 fund missed by the amount of their expense ratios plus an additional 0.38%, or 38 basis points (one basis point is 1/100th of a percent)
That doesn’t seem all that bad to me, but Vanguard seems to claim that they stay within 5 basis points, which is a lot better.
I did some research on index funds a while ago, and it does seem that individuals who invest in index funds do substantially worse than the index funds themselves, because they buy into the funds during bull markets and sell on the dips. But people who buy and hold index funds for the long haul return close to the same as the fund itself.
Vaguely related question:
Do index funds, in practice, actually get returns that match the numbers people quote when they say “The S&P 500 returned X% over this time period”? After all, index funds have to actually go out and buy the stocks that are listed on stock indexes, which makes them subject to transaction costs, temporary fluctuations in supply and demand, and other issues that can cut into their returns. There are enough index funds that the mere fact of being chosen to be listed on an index can cause a stock’s price to rise as index funds run out and buy the stock, and my brother’s job at Goldman Sachs largely consists of finding ways to make money by exploiting the way market prices change in response to trades that index funds have to make. All this makes me suspicious that there might be a big difference between the returns earned by “The S&P 500″ and by “Giant Bank’s S&P 500 Index Fund.”
Suggesting it’d better to buy the top 501 instead, to avoid the threshold effects.
That doesn’t seem all that bad to me, but Vanguard seems to claim that they stay within 5 basis points, which is a lot better.
I did some research on index funds a while ago, and it does seem that individuals who invest in index funds do substantially worse than the index funds themselves, because they buy into the funds during bull markets and sell on the dips. But people who buy and hold index funds for the long haul return close to the same as the fund itself.