Comment by froogle | Hacker News Reader

Comment by froogle | Hacker News Reader

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Cap-weighted funds (like anything tracking the S&P 500) already hold the stocks in comparison to their market cap.

If a stock goes up, they don't need to buy more of it - the value of the shares they hold will increase to exactly the right proportion that they should have.

(There do exist other types of funds which try equally weight the stocks they hold, which means the fund has to rebalance when the stocks change price.)

Typically, cap-weighted funds only have to rebalance when individual members of the fund buy/sell - and they try to make it so people are buying/selling to those within the fund where possible to avoid having to do even that. The result is a very low churn, which is part of why index funds have lower fees.

Usually, the more assets an index fund has under management, the lower an index fund's fees get.

That makes sense, thank you. Where does the tracking fee come from then?

EDIT: and doesn't my above argument hold at the boundary? When a stock is brought into the S&P, suddenly all of the index funds need to stock up on it, further bolstering its price, no?

Fees come from the transaction costs of having to buy/sell shares (churn is low but non-zero), operate websites, paying salaries, running customer support, doing tax paperwork, etc. Not much magic there.

You're correct about what happens at the boundary, yes.

There's a well-known arbitrage opportunity for stocks that are known to be about to be brought into the S&P 500 (their prices DO tend to increase, I believe), if you want to research that. Like all publicly known arbitrages, I doubt you can make any money off it personally anymore though.

This is part of why the recommendation is not to use an S&P 500 fund, but something more like Vanguard's Total Stock Market fund, which includes medium/small-cap companies. Not that it's a huge deal, though - mutual fund companies are usually pretty clever about spreading large orders out over time.

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