International Is An S&P 500 Index Fund Portfolio a Smart Idea?

Discussion in 'Shares & Funds' started by oracle, 4th Jan, 2022.

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  1. oracle

    oracle Well-Known Member

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    Interesting video. The outperformance of small cap value is amazing over long period of time if you can stay the course.



    Cheers,
    Oracle.
     
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  2. Gav

    Gav Well-Known Member

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    Thanks Oracle, nice video
     
  3. DanW

    DanW Well-Known Member

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    I wonder if the international stocks basket chosen was hedged or unhedged for currency fluctuations. I'm not sure what's in that basket but if these countries on average had a currency decline vs the USD over that 30 year period that could explain a large part of the difference.

    In any case you don't know for sure if your own countries currency (and stock market) will hold up against the rest of the world in the future, it does seem prudent to have something diversified outside it. Imagine if you were Japanese before the decline of their economy, and only ever invested locally in Japan's stocks it would've been a disaster. I like his reasons to not chill, and of course adding REITs :)

    Regarding the second part of the video - where he says it's true that small cap value has underperformed large caps in the recent years; There is a theory that the reason for this is the massive inflows into passive index funds (and recently outflow from active managed funds). The index funds usually weight by market cap, eg the top 10 stocks are allowed to account for 28% of the index. Just getting into the index itself solidifies their position because the inflows will keep the bid on.

    At what point does passive index investing stop working because there's no other game and everyone's doing it?

    If you like this sort of thing, a great video recently about index investing issues is this one:
    Yes it's long AND he's a slow speaker, but watching it on 1.25 and even 1.5 speed made it great. Alot of very good points, though I don't really agree with his INFL fund holding some things that have become very overvalued.
     
  4. Silverson

    Silverson Well-Known Member

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    Just add VISM?
     
  5. Hockey Monkey

    Hockey Monkey Well-Known Member

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    Lots of misinformation in this video.

    - Trading sets pricing, not AUM. Index investors don’t typically trade much and much of their trading is on the secondary market which doesn’t impact the price of underlying stocks
    - Market cap weighted funds don’t need to trade to track the index. By definition it just floats up and down by market cap

     
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  6. DanW

    DanW Well-Known Member

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    Not misinformation, just a different opinion to your video.

    The video you linked is a good one, though it is before the whole pandemic flood of money into index funds played out to see the S&P500 where we are today.

    Saying that a booming secondary market doesn't affect price discovery in the underlying securities, is like saying a boom in the futures market is not going to lead to a boom in an underlying asset. If the secondary market price is pushed up, there will always be someone ready to arbitrage that by buying up individual stocks combined with selling the ETF. Derivatives and other investment vehicles can affect prices even if they are one step removed, the only thing in debate I think is "how much" do they affect it.

    To say that price discovery doesn't happen because trading is on the secondary market isn't telling the whole story. An increase in AUM of physical ETFs removes shares off the market, it has taken up shares that were offered for sale. If index funds are net buyers, they have essentially reduced the available share available to trade at the same time as being net bidders. Similar to buybacks, but kind of temporary because if index funds ever have a net outflow those shares will be returned to the offer.

    The less shares that are actively traded, the more scarce they are. If the number of non-index buyers is the same, they are bidding for a fewer number of shares. At the same time the index fund has some bids in, but doesn't have any offers because of net inflows.

    His best point is regarding the decrease in cost of short selling. This can offset all of the shares that have been removed from active trading by the index funds.

    He doesn't outright say that index funds have no effect, but his opinion is that the effect is low. I don't know if there will ever be a way to know how much they have affected that market, but it's certainly more than ever before even if that effect is not as big as the bubble fear mongers warn us.
     
  7. Redwing

    Redwing Well-Known Member

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    Steven Bregman happens to be president and co-founder of Horizon Kinetics, which is the advisory for a line of actively managed mutual funds. His livelihood depends on people willing to pay expense ratios in excess of 1.60% for his firm's active fund management ;)