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The crowd's wisdom extends to the indexer. Another issue with these index-linked funds is that they create a single point of failure, i.e. the few people at Rus
by yborg 9y ago
The crowd's wisdom extends to the indexer. Another issue with these index-linked funds is that they create a single point of failure, i.e. the few people at Russell that curate the index. It would be very very easy for someone to, um, externally compensate an individual or two at Russell to include a dog in the index for the purpose of a massive stock pop. Similar to the bond-rating agency fiasco(s) leading up to the 2008 crisis.
However, once an index is compromised like this, its overall returns will begin to suffer and people will move out of, say, Russell-linked funds. If it gets bad enough across the board, active-managed funds will begin to consistently outperform index funds and people will move their money there ... which presumably will rebalance the indexes. As far as I can see it, over the long term the system should self-correct.
- b4lancesh33t 9y agoIt would also be pretty easy to spot something like that happening. If you see a stock in the Russell 3000 that is substantially less valuable than the distribution's tail would lead you to expect, then somebody is probably fucking with things. I would be astonished if Vanguard and other fund managers do not have automated monitoring to detect cases like this.
- Tehdasi 9y agoThis is possible but unlikely. Bond rating agencies can more easily get away with mischaracterising "new and innovative" products than index funds can cheat investors. Index funds publish their methodology, and there is very little subjectivity (if any) in the application of these rules, that is after all, the point on an index fund. It would be far too easy to sue index funds if there were to defraud investors, and depending on the action and jurisdiction, criminal charges. Also if there was an issue with governance with index funds, going to a fund where governance is even more subjective would hardly seem to be an answer.
- givehimagun 9y agoI think you hit something right on the head. The index itself is defined by a formula that we generally agreed upon. We only need to have more choices of formulas...Russell is capitalization based - maybe that is too simple? Can we make a Hacker News 5000?