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> What happens if there is a small, but synchronized outflow for any reason? If customers ask for 1% of index funds to be sold, index funds have to sell 1% of t

> What happens if there is a small, but synchronized outflow for any reason? If customers ask for 1% of index funds to be sold, index funds have to sell 1% of their holdings in the exact ratios defined by the index That's pretty interesting. In 2019, the average daily trading volume of Berkshire Hathaway (class A) was 0.04% of the total shares outstanding. If all people that held this stock were forced to sell 1% of the total shares outstanding, look out! On the other hand, Roku has averaged 15.6% this year, with a standard deviation of 10. 1% of total shares isn't even going to be noticed.

Retric 7y ago
Index funds can and generally should skip Berkshire Hathaway class A and just buy class B stocks without issue. It’s meaningless in this context. The SP500 has a long tail 150M on a 20B dollar company, which is the median, is 0.75% per day that’s quite a bit of motion normally but you expect volatility to go up on a major sell off. Anyway, if 1% of all money is removed from index funds on the same day whatever caused that is also going to cause the market is going to crash and crash hard. It would take something like an outbreak of Ebola in NYC to get that kind of a reaction.
- mcguire 7y ago
  If 1% of the money in index funds exited the market in any form (not just index fund withdrawals), it's going to be a bad day any way you look at it.
  - segmondy 7y ago
    I think the fund managers know this and will collude to prevent it from happening. They are smart enough to know about game theory, it's not their money. So they can sit and not go on a selling frenzy.
    - danw1979 7y ago
      Are they manually managed though ? isn't there an algorithm somewhere responsible for balancing these funds ?
mcguire 7y ago
That's an interesting point; it would seem like the stocks Michael Burry, the Big Short investor, likes would be in the same boat. Or maybe he's counting on their low volume? :-)
lyrrad 7y ago
My understanding is that the largest index funds use free-float weighting. This adjusts the weight of a stock in the index by the proportion of the stock that trades freely in the market. https://en.wikipedia.org/wiki/Capitalization-weighted_index#Free-float_weighting https://en.wikipedia.org/wiki/Capitalization-weighted_index#... In the example you give, this should result in Berkshire Hathaway Class A to have a very small weight in an index fund weighted this way. Looking at the holdings of VOO, as of July 31, 2019, It holds 806 shares of Berkshire Hathaway (Class A) (worth ~$249 million), but about 37 million shares of Class B, worth ~$7.6 billion. https://investor.vanguard.com/etf/profile/portfolio/VOO/portfolio-holdings https://investor.vanguard.com/etf/profile/portfolio/VOO/port...
abetancort 7y ago
If you are buying Berkshire with as a short term investment and you’re not a market maker, you are an idiot.

Retric 7y ago

Index funds can and generally should skip Berkshire Hathaway class A and just buy class B stocks without issue. It’s meaningless in this context. The SP500 has a long tail 150M on a 20B dollar company, which is the median, is 0.75% per day that’s quite a bit of motion normally but you expect volatility to go up on a major sell off. Anyway, if 1% of all money is removed from index funds on the same day whatever caused that is also going to cause the market is going to crash and crash hard. It would take something like an outbreak of Ebola in NYC to get that kind of a reaction.

mcguire 7y ago
If 1% of the money in index funds exited the market in any form (not just index fund withdrawals), it's going to be a bad day any way you look at it.
- segmondy 7y ago
  I think the fund managers know this and will collude to prevent it from happening. They are smart enough to know about game theory, it's not their money. So they can sit and not go on a selling frenzy.
  - danw1979 7y ago
    Are they manually managed though ? isn't there an algorithm somewhere responsible for balancing these funds ?

mcguire 7y ago

That's an interesting point; it would seem like the stocks Michael Burry, the Big Short investor, likes would be in the same boat. Or maybe he's counting on their low volume? :-)

lyrrad 7y ago

My understanding is that the largest index funds use free-float weighting. This adjusts the weight of a stock in the index by the proportion of the stock that trades freely in the market. https://en.wikipedia.org/wiki/Capitalization-weighted_index#Free-float_weighting https://en.wikipedia.org/wiki/Capitalization-weighted_index#... In the example you give, this should result in Berkshire Hathaway Class A to have a very small weight in an index fund weighted this way. Looking at the holdings of VOO, as of July 31, 2019, It holds 806 shares of Berkshire Hathaway (Class A) (worth ~$249 million), but about 37 million shares of Class B, worth ~$7.6 billion. https://investor.vanguard.com/etf/profile/portfolio/VOO/portfolio-holdings https://investor.vanguard.com/etf/profile/portfolio/VOO/port...

abetancort 7y ago

If you are buying Berkshire with as a short term investment and you’re not a market maker, you are an idiot.