A dumb question I've always had: for their S&P 500 Fund, is Vanguard just free-riding off the work of S&P, leading to their low management fees? Or is the work that goes into selecting the 500 companies in the index pretty minimal?
Managing the S&P 500 fund is actually pretty tricky since everyone knows when the index changes and they know what trades you have to make so they try to take money from you. You have to employ a lot of tricks to avoid being victimized as an index fund.
Edit: I should point out that the index isn't really _just_ the largest 500 companies; they try to keep it properly weighted by sector and some other considerations as well.
I'd agree that managing an ETF is probably harder than most people think, but its very debatable as to if ETF's are being "victimized". Like the linked article says, if you want to buy large chunks of a company then you have to pay for it.
http://kiddynamitesworld.com/where-bloomberg-discovers-that-...
A simple example: lets say company X and Y are both on the index and they decide to merge one company X on such an such a date. In order to keep 500 stocks in the index S&P has to choose something to replacement. You don't have to be very smart to see that X and Y are in talks about merging months in advance. It isn't hard to figure that the stock S&P chooses will be one of a few: Buy a bunch of them each at today's prices. When the merge happens all those index funds now buy the replacement stock which drives the price up, you have shares at an inflated price to sell to those funds. (You have figure out when to sell the stocks that were not added - but S&P is unlikely to add a bad stock so as an investment these are likely to do okay). This is easy if the index funds try to hold exactly what the S&P 500 has in it.
Because of the above index funds promise to mirror the S&P500 results, but not the actual stocks. It is easy to say mirror results, it is much harder to pull that off, even if we ignore those above who are trying to cheat you, index funds tend to be the largest funds (because they do so well they are popular!) which means most of your trades will affect the price of the stock.
There is a lot more involved (much of it that I don't know), but the above is a simple example that will get you on the right track of thinking.
The former indicates that you must get your order filled at the closing price, the latter allows you to specify a limit at which you'll go to, in order to trade at the closing price.
How else would funds that need to trade at the closing price, actually trade at the closing price?
Now you may not like the closing price, but that's another story.
> The closing price is the just the price that marked the last trade of the day, and isn't otherwise special.
I guess i should also point out that many ETF's mark their value based on the closing prices of the NYSE or Nasdaq making their closing prices very important.
I'm pretty sure at this point I'm being trolled but just in case you are being serious and don't know how to google......
> No you can't. You can only buy a stock based on the set of offers to sell that stock
First you said that you can't buy/sell at the closing price and I showed you that this is wrong. Infact there are a whole lot of people who are obligated to trade at the closing price
Then you said the closing price wasn't special. This as well was shown to be false as many ETF's are marked by the closing prices of certain markets, notably the NYSE.
Then you said you aren't guaranteed to get the closing price. This was an even stranger error as the message before I showed you the MOC order which indicates that you will trade at the closing price.
Finally you tripled down on this mistake by changing your argument that technically there might not be any trading partner at the close.
This is technically true that in theory it might happen, but in practice I'll sit and wait for you to find me a case where this happened.
I mean think about it. You put out an MOC order that indicates you need to get a buy order filled. Unless you are trying to buy some crazy amount of shares, you will get filled. depending on the price the closing price can move up to 10% or 20%. This means that an arbitrager can pick up shares on the cheap or sell them for an artificially high price.
The system just works.
I get that you don't work in finance but you continue to keep making the same false statements over and over again:(
> kgwgk: But you can trade at the closing price, which is the one used by S&P to do their numbers, can't you?
> readams: No you can't. You can only buy a stock based on the set of offers to sell that stock
readams is unequivocally correct here. You can attempt to trade at the closing price, but doing so is entirely at the mercy of whether or not enough open offers exist to sell that stock.
> chollida1: Then you said the closing price wasn't special. This as well was shown to be false as many ETF's are marked by the closing prices of certain markets, notably the NYSE.
This point by readams is also true. The closing price of a stock isn't special — it's, as (s)he said, simply the price of the last trade of the day. The fact that some ETFs are marked by the price of market close makes their trading price "special", but that doesn't imply anything particular about the closing price of the asset(s) they're based on.
> chollida1: Then you said you aren't guaranteed to get the closing price. This was an even stranger error as the message before I showed you the MOC order which indicates that you will trade at the closing price.
Again, readams is correct. You're guaranteed to get the closing price if and only if there are open orders at that price. Which is a big if and only if, and not actually a guarantee.
> chollida1: Finally you tripled down on this mistake by changing your argument that technically there might not be any trading partner at the close. This is technically true that in theory it might happen, but in practice I'll sit and wait for you to find me a case where this happened.
Consider the context of this entire conversation: index funds that manage billions in assets. If you don't think they can utterly exhaust open buy/sell orders at market close for any trade they need to execute to track their index, you've lost your mind. This whole thread was about how these funds have to strategically place their orders to track the underlying index as faithfully as possible, without losing their shirts to vultures who know that large funds have to execute certain orders to stay on track.
The closing price is special -- there's a special procedure to set the price and determine which orders execute (quite similar to the opening procedure), NYSE has a closing auction, NASDAQ has a closing cross, I'm sure most other exchanges have similar.
If there's no market/limit on close orders for a given stock, then the closing price would be the last trade; presumably the same for a stock which had its trading halted earlier in the day.
Wikipedia says:
Limitations on types of securities:
> Securities that are ineligible for inclusion in the index are limited partnerships, master limited partnerships, OTC bulletin board issues, closed-end funds, ETFs, ETNs, royalty trusts, tracking stocks, preferred stock, unit trusts, equity warrants, convertible bonds, investment trusts, ADRs, ADSs and MLP IT units
Limitations on exchanges:
> The securities must be publicly listed on either the NYSE or NASDAQ.
And of course the actual selection criteria is even more elaborate.
Which leads to my question--is that extra work relatively minimal or significant and hard to produce?