What’s Better Than Buying An Index Fund? Buying Index Stocks, That’s What.

What's better than buying an index fund and paying 9bps to replicate benchmarks as they're propelled into the stratosphere by a coordinated dovish pivot from central banks? Well, buying the stocks of the companies which created the indexes, for one thing. S&P Global Inc. is up nearly 60% in 2019, doubling the performance of the S&P 500, while MSCI Inc. rose nearly 75% on the year. As Bloomberg (a company which knows a thing or two about creating indexes and charging for access and l

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4 thoughts on “What’s Better Than Buying An Index Fund? Buying Index Stocks, That’s What.

  1. My two cents:
    Cent 1. Years ago, when brokerage commissions were higher, I was much more willing to pay fees to a passive fund manager to buy the index for me. If I wanted a smaller position, the transaction costs were just too high. As of this year, multiple brokers are offering zero commission trading. So if you are buying an index that calls for you to own 167 shares of a stock, and then next month you want to add to your position and need to buy another 37 shares, you can do that without paying fees. You can just decide if the extra effort needed to avoid fees is worth your time.
    Cent 2. With respect to the issue of buying stocks no one is analyzing, I question how much benefit you get from diversifying by purchasing every single stock in the index. If you get down to the names that are so small, there is not enough “smart money” analyzing the company, why not just stop buying? Those small names probably don’t impact the index that much. Your returns won’t match the index. But depending upon the index, buying the top 30 names may give you most or all of the diversification you need.

    1. About Cent 2.), the problem with that approach is the composition of the index also changes with respect to weights etc. Companies drop in and out of it, and some of the small companies at the bottom of the scale become the elephants of tomorrow.

  2. This is nonsense. There is no ‘price discovery’ anymore, not when the Fed backstops prices and the major buyers are just companies doing the buyback shuffle. Also, the index tracks the freaking market. The index can’t ‘go down more precipitously than the market’ or there would be an easy arbitrage opp. So I call bullshit.

  3. The Fed doesn’t backstop any individual stock, hence price discovery continues. Good / bad news still drives a stock’s price up / down. The passive fund / ETF tracks its index most of the time (maybe not during flash crashes) but you don’t necessarily want to own the index.

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