The first totally utterly completely free index fund?

[hiriskpaul]

I think that you guys are missing the point as far as managed funds are concerned. They do not have to invest in every share in their universe, nor do they have to follow market weighting.

No, I am not missing the point. If an actively managed fund did invest in every share by cap weight they would not be an actively managed fund

If you take the shares in the FTSE350, for example, over the course of the year some shares will do better and some worse than the index itself. It only requires active fund managers to pick more of the better ones, and to weight their holdings differently, for them to outperform. They tend not to do this, of course, because of their sheep-like behaviour. There is no statistical reason for it, just their behaviour.

TJH

Unfortunately shares do not come with "better one" labels, but this is a good description of what every active fund manager is trying to do - overweight the shares they think will give better than market returns, underweight or exclude entirely the shares they think will underperform. In addition they may well have their particular favoured strategies, such as growth, value, momentum, income etc. and may exclude certain shares that don't fit their particular strategy, world view, or whatever, but no fund manager will want to overweight a share that they think will underperform the market. No rational fund manager anyway. If some managers exclude or underweight a share, then others must include/overweight. Those overweighting will be doing so because they believe the share will outperform.

[tjh290633]

Your penultimate sentence reveals the fallacy. There is no "must" about it.

TJH

[hiriskpaul]

Your penultimate sentence reveals the fallacy. There is no "must" about it.

TJH

So who is holding the shares that nobody wants? Or to put it another way, how can all fund managers be underweight a share?

I can assure you there is no fallacy. All shares have to be held by someone.

[Alaric]

how can all fund managers be underweight a share?

There are shares that don't form part of a "fund" which is managed. Buy and hold private investors being an example.

[hiriskpaul]

how can all fund managers be underweight a share?

There are shares that don't form part of a "fund" which is managed. Buy and hold private investors being an example.

I was following GeoffF100's definition of a fund manager and including private investors as fund managers. You are right though and this is a point I made earlier. One set of fund managers, such as those managing UK all company OEICs, could in aggregate beat the market, but it would have to be at the expense of all other holders of UK shares, including private investors. The aggregate of all shares in the market must track the all companies index before costs, so not everyone can beat the index.

[Lootman]

Adding to this theme, some major US share dealing firms cut their commissions for trading shares and ETFs yesterday: Charles Schwab and TD Ameritrade.

To zero!

So we now have a situation in the US where you can buy a share or ETF for no cost (there is no stamp duty in the US). And moreover if it is a zero-fee ETF then there is no carrying cost either. Then when you sell, that costs you nothing as well.

Not surprisingly the share price of US brokers and dealers crashed yesterday as a result.

https://www.npr.org/2019/10/01/76611088 ... d-the-norm

But can this happen here?

[johnhemming]

In its announcement, Schwab said eliminating online trading commissions equates to about $90 million to $100 million in quarterly revenue, or about 3% to 4% of revenue.

One assumes they also have other charges and are cutting these specific ones as essentially a loss leader.

[Lootman]

In its announcement, Schwab said eliminating online trading commissions equates to about $90 million to $100 million in quarterly revenue, or about 3% to 4% of revenue.

One assumes they also have other charges and are cutting these specific ones as essentially a loss leader.

E*Trade folowed the other two today.

They don't have other charges for brokerage accounts, unless you choose an extra service like margin loans. But those companies do have other streams of revenue. For instance, for Schwab commissions represent less than 10% of their revenues. For TDAmeritrade it is less than a quarter. They figure if you use their dealing account then you might buy banking or insurance services from them, or pay for a managed account.

The key in the US, more so than the UK, is to get assets under management. They are judged by their AUM and how they are growing or declining. They are often quoted in terms of a percentage of their AUM.

And the real loss leader, or gateway drug if you prefer, are the new "disruptive" phone-based free share-dealing services that are popular with younger investors. They are venture capital enterprises with no need to actually make money. They just want to grow. Call it the Uber effect.

But I offered up this trend not as a commentary on whether stockbrokers and asset managers are good value as investments. But rather that securities investing is becoming a zero-cost game. And that makes it harder for the active managers of money to beat the market. They have to out-perform by 1% or 1.5% a year just to keep up.

Beta has become free.

[johnhemming]

I would think post WeWork etc that the strategy of "profits don't matter at all" will be open to more challenge.

I accept entirely that there is an argument for offering free services as part of establishing a commercial relationship (something I am doing myself), but I would think the VCs funding free brokerage will stop at some stage.