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Comment by tanderson92 | Hacker News Reader

The Dow Jones index being a poor index (as well as being a price index) does not mean the idea of a stock market index is a poor one; the title of the article especially was poorly chosen by the editor. The S&P500 Index is another stock market index and is far from meaningless -- its level reflects expectations about the future profits of the largest 80% of American companies. The S&P500 has its own weaknesses because it does not fully capture the stock market (use something like the CRSP Total Stock Market Index or the Dow Jones U.S. Total Market Index) and because it is a price index (compare to the German DAX which is total return-based).

The article overreaches in its conclusions.

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Agreed. These indices are extremely useful for trading.

For just under $275, just about anyone can buy a share of SPY and make/lose money based on trends across a diverse array of the largest companies in the world. Without indices, you'd have to spend tens or hundreds of thousands of dollars for this kind of diversification.

It's also useful for tracking trends within specific sectors. Think tech is undervalued? Invest in a NASDAQ ETF like QQQ or NDX. Maybe you read that OPEC is planning to increase oil production and you think that's going to devalue existing oil supplies, so you take a short position on XLE (an energy index ETF).

The relative simplicity of indices means there's a lot of volume and liquidity. It's not easy to find a buyer for shares in an obscure oil company, but lots of investors would be happy to buy your energy index ETF shares.

I love indices. I'd be hesitant to invest in sectors I don't know much about, like construction materials. They're heavily affected by the price of raw materials, and lately all this tariff talk has caused a lot of volatility in those prices. Which individual companies should I get involved with? It's hard to say without a fair bit of research because it's a specialized field. With an index ETF, I can quickly take a long or short position to get a little exposure to the sector without having to dig too deep.

Just a quick point of correction - be careful not to confuse an Index with an Index fund. You are talking about ETFs, which come in Index fund varieties, but the Index exists as a market indicator, not for the purpose of creating a fund. ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes.

Yes, you're correct. I didn't do a good job explaining the difference. I considered editing to add a note, but I think your comment explains it clearly enough to make that unnecessary.

> ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes.

It's rumored that Vanguard 'bribed' CRSP to create its Total Market index (and etc for other funds) so that its licensing fees to MSCI / Dow Jones would be lower. So while it is true they do not maintain the indices, it is possible they have a heavy role in creating the indices.

Yeah, I considered adding that Index funds "mostly" don't create indexes, but I'm sure that some do. And some ETFs have been created that almost track certain indexes. You see special ones that are mostly S&P500 without tobacco or without guns or some other ethical choice.

On a related note, there are a _lot_ of indices. FT reports that there are over 3 million stock indices, for ~50k public stocks [0]. You can make an index with basically anything in it. There are indices for emerging markets, for the Gulf region, for companies in Mexico, for companies which qualify as ESG (environmental, social, and governance) criteria. There are indices of stocks that historically perform well in periods of rising interest rates, and there are indices for the Eurozone.

The ETFs just build on top of the index. In almost every prospectus, there is some kind of note about which index it is. You can go look at how the index is arranged, and there are sometimes multiple funds that track indices in the same sectors, with different weights. If you're not happy with the amount of Berkshire in your financials ETF, you can go find a fund which uses a different index and buy that instead.

If anything, a stock market index is _more_ valuable in a digital world, because it effectively adds a layer of abstraction to the typical notion of investing.

[0] https://www.ft.com/content/9ad80998-fed5-11e7-9650-9c0ad2d7c...

Also, while buying & holding an ETF based on the S%P 500 is the canonical low-effort investing advise, it is trivially easy to beat this strategy by choosing an index that performs better historically. E.g. the Russel 2000 or some other index that captures the price movements of medium sized companies. The S&P 500 tracks the biggest companies, which necessarily are the ones that have done most of their growing already.

> it is trivially easy to beat this strategy by choosing an index that performs better historically.

Past performance is no guarantee...

This is a very subtle question which is far from resolved[1] in the academic literature; it is nowhere close to the slam-dunk you state it is.

[1]: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3122326

I think what the author is trying to point out here is that in the world we live in today the stock market indexes are less valuable. Stocks used to be able to be bought using technicals like the P/E ratio and other financial tools. As companies like facebook and snapchat and the likes. Companies whose values cannot really be calculated by the assets they hold (land, machines and factories etc). Their value is in their Brand, their IP and other subjective articles. But they are listed in the stock market and they dominate the stock market today. It generally makes these tools weaker in calculating the value of the market using stocks which was created for an industrial age

> Companies whose values cannot really be calculated by the assets they hold

Assets have value for the cash flows they promise. Facebook is a dead simple valuation exercise on a PEG basis.

In March 2000, tech companies represented 35% of the S&P 500 by market cap.

Cisco was briefly the largest company in the world, with a market cap similar to Facebook today (taking inflation into account its market cap was similar to Amazon today).

https://www.bizjournals.com/sanjose/stories/2000/03/20/story...

These were the ten largest companies in the S&P 500 in January 2000: Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and HP.

Stock in Facebook is the same principle as stock in Ford. You are simply buying a share of the company. I don't see how indexing them is any less the beneficial now then it was twenty years ago

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