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Comment by arielweisberg | Hacker News Reader

If it were 20+ basis points a year it should show up in the returns and as a failure to track the index. I am not an expert, but that isn't what I see eyeballing a chart of VFIAX over 35 years. It doesn't track perfectly by an amount that does matter, but not .20 basis points a year.

Also by this logic total market funds should outperform other indexes by a healthy amount over time. Also maybe not what we are seeing. Granted total market funds invest in something that is different from what other indexes track.

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No, the 20+ basis points is considering how the index itself underperforms, because stock prices get bid up just before they get added to the index and then drop back down as the liquidity crisis settles. The index, not just the etfs, take a hit. Vanguard claims to soften this by trading more deliberately and not buying or selling it all at the opening auction on the day a stock gets added or removed, respectively. So you would expect them to be able to do better than the actual index (until you add in all the other management costs/trading costs).

To an extent the amount the ETFs are effective at this lowers the amount the index underperforms, because they (the etfs) are themselves the driver of the liquidity crisis the index is getting subject to. So you would expect some sort of equilibrium, and the claim is therefore to be taken that this equilibrium settles down at of 20+ basis points.

And yet, the index itself (not even the funds) reliably beats the overwhelming majority of active traders over almost any time window you care to look at.

That is typically due to low fees though, and not something that is inherently due to it being an index.

Hint: The people constructing the index are doing as much of an active choice of stocks as the active traders are. Nothing stops a trader from selecting stocks following the same strategies as how an index is selected.

The majority, sure, but not all. Look at since-inception charts of POGRX, VHT, and BRK.B for example.

However, for a lazy or casual investor discovering the difference between the good managers and the lucky managers is very hard.

Eh, just compare the active fund against the S&P 500 on a suitably long enough horizon:

https://www.google.com/finance?q=NYSEARCA%3ASPY%2C+NYSEARCA%...

I'll admit it's looking for a needle in haystack though. In all my looking I've only found these three. Really just VHT and POGRX, since the success of BRK (Warren Buffett's company) is common knowledge.

Thanks that is very enlightening as to how this front running manifests.

Still makes me wonder if that means I am going to get an extra 20 basis points for free out of VTSAX.

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