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Reminder: "index funds" are also managed by humans. For example, all stocks in the S&P 500 are chosen by Standard & Poors. Stocks are added and removed as they
by kolbe 7y ago
Reminder: "index funds" are also managed by humans. For example, all stocks in the S&P 500 are chosen by Standard & Poors. Stocks are added and removed as they see fit based on various criteria such as profitability, float, market cap, &c. The only things that I can see that truly differentiate S&P from other active managers are that they
(a) have very little skin in the game.
(b) they get to make decisions about what other people have to do with their money
(c) they tend to recommend more stocks with less turnover than typical active managers
(d) they tell the public ahead of time what will be bought or sold, so traders get to buy/sell ahead of time
(e) their actions are relatively predictable, thanks to a long history of sticking to their stated goals.
- gzu 7y agoThe S&P 500 is basically a group of largest established 500 market cap stocks traded in the US proportioned to market cap. There is no active management determining price and weights here.
- Aunche 7y agoI don't think so. Otherwise Uber and Snap would both be in the S&P 500.
- FabHK 7y agoThere are certain criteria, see [1] or [2] for a summary. They need to be publicly traded for sufficient time, have sufficient free float, be profitable, etc. See [3] for example on why Tesla isn't. [1] https://us.spindices.com/documents/methodologies/methodology-sp-us-indices.pdf https://us.spindices.com/documents/methodologies/methodology... [2] https://en.m.wikipedia.org/wiki/S%26P_500_Index#Selection_criteria https://en.m.wikipedia.org/wiki/S%26P_500_Index#Selection_cr... [3] https://seekingalpha.com/article/4088016-will-tesla-join-s-and-p-500 https://seekingalpha.com/article/4088016-will-tesla-join-s-a...
- kolbe 7y agoYep. So, you don't just own the top 500 stocks by market cap. You own a set of stocks that resemble that idea, but are in fact still choices made by S&P. Also notice that stocks don't immediately get dropped when they fall below that criteria; there's a buffer for how bad they have to get to be dropped. Additionally, the rules governing these choices are free to change at any time. For example, whether stocks with split voting shares should qualify is still a discussion. Let's also not forget Hacker News's favorite law: Goodhart's Law. The S&P has performed wonderfully well when it was observed as an index. But now that it's a target, the world will change around it.
- gzu 7y agoIt’s a huge stretch to say the S&P 500 isn’t the current top 500 stocks by market cap just because they don’t include several recent IPOs and have discretion to exclude stocks based on potential stock manipulation. These are very rare cases that have little affect on the overall index. In time (not instantly) they add large established companies. Proportions are always weighted directly to market cap percentage. They’re not weighing some stocks higher than others like how an active manager would allocate. Agree “beating the index” is quite a joke since that is the benchmark for fund performance and so much money is passive invested now. Matching the index performance is saying “our fund equities have appreciated on equal basis to how all others have”.
- thekyle 7y agoTechnically, the S&P 500 isn't actually the largest 500 companies by market cap. S&P has a committee that decides to exclude some stocks. That said, for all practical purposes it is basically the 500 largest companies.