Growth of Index Funds

[REWahoo]

One of the charts in the article Why trading volume is tumbling, explained in 5 charts shows tremendous growth since 2007 in index funds and exchange traded funds that track indexes.

These two types of funds have grabbed about 24% of the U.S. mutual fund and ETF market, down [should be "up"] from less than 5% in 1998...

Equally revealing is the corresponding decline in growth of actively managed equity funds.

 

[Totoro]

Thank you for that chart!

I guess this means the financial industry might be shrinking pretty fast in the near future.

One thing I haven't solved yet is whether this means we'll get more stable returns (more people 'staying the course') in the future or not (people remain emotional, regardless of how their investment is structured).

 

[frayne]

Wonder what percentage of index funds are held by institutions as opposed to individuals ?

 

[Lsbcal]

Interesting but I'm not sure it means a lot to my gains/losses. The mutual fund flows data doesn't seem to show any major trends. Probably a good thing.

FWIW, most of our funds were in indexes as of early 2009. Part of a major strategic overhaul.

 

[mickeyd]

I've been 100% VG index funds for 10+ years, making very few contributions to my stash, yet it continues to double every 7-8 years. Is it the indexing or am I just a damn good investor?

 

[Independent]

Interesting.

If I understand the theory correctly, indexing "works" because there are so many people who are actively managing money. If indexed investing dominated, then there would be gains to active management.

So, there must be some natural limit on the percent of all investment of a certain type that we'd expect in indexed funds. Fortunately (for me) I think we're a long way from that limit. The chart prior to the one in the OP shows that indexed funds are only 18% of the equity fund market (and, of course, a smaller share of the total equity market).

2014 Investment Company Fact Book

 

[NW-Bound]

According to Morningstar, the flagship Vanguard S&P 500 annualized total return for the past 15 years was 4.25%, which is not that great, even if it might beat some active funds.

The same page shows that the "investor return" of this fund for the same period was a mere 1.83% annualized. This bleak return did not even match the inflation, which ran an annualized rate of 2.4% from May 1999 to May 2014. It shows that indexing investors still make bad moves in/out of the fund.

This begs a following serious question. If even investors of the largest index fund still trail the market so badly, who are the other side of the scale? Who captures all that excess gain? If not other retail investors, then perhaps big financiers like Soros and Dalio?

PS. Thanks to photoguy for pointing out to me the "investor return" data provided by Morningstar.

 

[Totoro]

Who captures all that gain?

Investment managers in hedge funds and private equity take home 1% or 2% / 20% carry. Same thing for various insurance companies.

Investment banks take home windfall profits from IPOs. The founders and capital backers too.

Top management of large corporates get a slice through stock options.

HFT firms take a tiny slice. Brokers as well.

Even vanguard gets a litte bit

And then of course the tax men in various countries. As a foreigner I lose for example 15% of all dividend returns in the US due to withholding taxes. Not sure if that's included.

 

[NW-Bound]

While talking about the fund return (for buy-and-hold investors) vs. actual fund holder return (for the clueless/hapless buy-high-sell-low investors), Running_Man in a past thread pointed out that investors of some active funds don't do too bad, compared to index fund holders.

So, I checked out the venerable Wellesley for a comparison to the Vanguard flagship index. Wellesley return for the last 15 years was 7.39% annualized, and its investors captured 5.99%. Comparing that to the numbers in my previous post, one can see that Wellesley fund holders commit less of the buy-high-sell-low goof.

 

[REWahoo]

... one can see that Wellesley fund holders commit less of the buy-high-sell-low goof.

We're trying to become goof-proof...

 

[NW-Bound]

Seeing that so many people do the buy-high-sell-low moves, doesn't that tempt you to try to do the reverse and buy-low-sell-high?

If so many people do the wrong thing and trail the index which is the average, then there are a lot of people who do the right thing and beat the index. Oui?

 

[Animorph]

While talking about the fund return (for buy-and-hold investors) vs. actual fund holder return (for the clueless/hapless buy-high-sell-low investors), Running_Man in a past thread pointed out that investors of some active funds don't do too bad, compared to index fund holders.

So, I checked out the venerable Wellesley for a comparison to the Vanguard flagship index. Wellesley return for the last 15 years was 7.39% annualized, and its investors captured 5.99%. Comparing that to the numbers in my previous post, one can see that Wellesley fund holders commit less of the buy-high-sell-low goof.

M* usually notes that the lower volatility funds have been easier to hold and have generally better investor returns. That's Wellesley.

It could also have nothing to do with investor behavior. I can see where a simple DCA from your paycheck over many years might not capture all of the fund's return over that period. Just because it wasn't a lump sum investment and the market perhaps did better earlier than later.

 

[REWahoo]

Seeing that so many people do the buy-high-sell-low moves, doesn't that tempt you to try to do the reverse and buy-low-sell-high?

No, it does not. See my previous post.

 

[NW-Bound]

Why not figure out what the "average" guy is doing and to do the reverse? There's a lot of money to be made.

 

[NW-Bound]

... I can see where a simple DCA from your paycheck over many years might not capture all of the fund's return over that period. Just because it wasn't a lump sum investment and the market perhaps did better earlier than later.

I wondered about that, and here's how Morningstar says it computes the number.

Morningstar Investor Return (also known as dollar-weighted return) measures how the average investor fared in a fund over a period of time. Investor return incorporates the impact of cash inflows and outflows from purchases and sales and the growth in fund assets. In contrast to total returns, investor returns account for all cash flows into and out of the fund to measure how the average investor performed over time. Investor return is calculated in a similar manner as internal rate of return. Investor return measures the compound growth rate in the value of all dollars invested in the fund over the evaluation period. Investor return is the growth rate that will link the beginning total net assets plus all intermediate cash flows to the ending total net assets.
​

 

[target2019]

Seeing that so many people do the buy-high-sell-low moves, doesn't that tempt you to try to do the reverse and buy-low-sell-high?

If so many people do the wrong thing and trail the index which is the average, then there are a lot of people who do the right thing and beat the index. Oui?

I'm not sure this is what awaits me. First, I'm fully invested. But when I do speculate a little, I'll buy individual stocks when they are valued properly. I'll take the dividends, and let other accounts with their index funds follow my allocation.

 

[Animorph]

I think they are simply weighting by the fund's assets each year (in whatever way makes mathematical sense for compound returns).

 

[Lsbcal]

Seeing that so many people do the buy-high-sell-low moves, doesn't that tempt you to try to do the reverse and buy-low-sell-high?

If so many people do the wrong thing and trail the index which is the average, then there are a lot of people who do the right thing and beat the index. Oui?

Bonjour, sounds great. Please present your plan backed up by copious research.

 

[REWahoo]

Why not figure out what the "average" guy is doing and to do the reverse? There's a lot of money to be made.

But what about those of us who think maybe we've already won the game and have no interest in taking risks to try to run up the score?

I may not have a sky box at the stadium but I've got some good seats, and I'll cheer you on.

 

[steelyman]

But what about those of us who think maybe we've already won the game and have no interest in taking risks to try to run up the score?

I may not have a sky box at the stadium but I've got some good seats, and I'll cheer you on.

You just keep thinking, Butch. That's what you do best.

 

[NW-Bound]

Investment managers in hedge funds and private equity take home 1% or 2% / 20% carry. Same thing for various insurance companies.

Investment banks take home windfall profits from IPOs. The founders and capital backers too.

Top management of large corporates get a slice through stock options.

HFT firms take a tiny slice. Brokers as well.

Even vanguard gets a litte bit

And then of course the tax men in various countries. As a foreigner I lose for example 15% of all dividend returns in the US due to withholding taxes. Not sure if that's included.

The MF return numbers do not include income taxes as these depend on the individual investor financial situation. However, they are already net of all market "friction losses". And then, the average guy manages to catch only a fraction of that MF return.

If you go to Morningstar and look at some MFs, you will see that all their investor returns over the last 15 year trailed the fund returns. All of them! Somebody's got their money. Who?

Is it the "1%"? Not the "1% in income" or "networth", but it could be. Is it a really exclusive group that we do not get to know personally? Or is it many little guys like me who beat the index over the last 15 years, and there are more guys like that than acknowledged in the media?

 

[NW-Bound]

Bonjour, sounds great. Please present your plan backed up by copious research.

I suspect financiers like Soros or the late Templeton just know how to "read" the market sentiment, and know what the "average" guy is doing.

Maybe they sell when there are too many "Wh***" or something intangible like that. That's what I like to learn, but of course even if you get close to them which is impossible, they are not going to tell.

 

[NW-Bound]

But what about those of us who think maybe we've already won the game and have no interest in taking risks to try to run up the score?

I may not have a sky box at the stadium but I've got some good seats, and I'll cheer you on.

Is the market really risk free? The last 15 years gave us some hair raising periods, and I have repeatedly shown that the S&P just recently broke even with the high in 2000. It was the recent surge that put it in the positive since that market top.

So, I do not think any of us are seating in the stadium. I feel like all of us are down there in the streets, facing the bull. I want to survive by buying-low-selling-high, while others call it rebalancing because it is the term condoned by the high priests. I think the only truly passive watchers are those in annuities or CDs.

 

[Animorph]

I checked my 5 year return for OAKEX. Plenty of buys and sells, probably rebalancing and added money. I don't think I veered significantly from a 5% portfolio stake. M* fund total return for 5 years ending 6/30/2014 was 16.37%, investor returns were 13.59%, my returns per Quicken were 17.34%. Yea! Guess I picked up some of that "average" investor money.

Think I'll leave it at that while I'm feeling smart.

 

[Lsbcal]

I think I recognize some of those ER posters confronting the bull in that picture.

Me, I am watching from a high perch.