Comments on: Index Funds and the Liquidity Premium http://wheredoesallmymoneygo.com/index-funds-and-the-liquidity-premium/ A personal finance blog written by Preet Banerjee Sat, 11 Feb 2012 16:22:10 +0000 hourly 1 http://wordpress.org/?v=3.1.2 By: Free Stock Trading Tools, Scam Alert, and Weekend Links | Million Dollar Journey http://wheredoesallmymoneygo.com/index-funds-and-the-liquidity-premium/#comment-2206 Free Stock Trading Tools, Scam Alert, and Weekend Links | Million Dollar Journey Sat, 25 Oct 2008 16:00:43 +0000 http://www.wheredoesallmymoneygo.com/?p=909#comment-2206 [...] WhereDoesAllMyMoneyGo writes about Index Funds and the Liquidity Premium. [...] [...] WhereDoesAllMyMoneyGo writes about Index Funds and the Liquidity Premium. [...]

]]> By: Preet http://wheredoesallmymoneygo.com/index-funds-and-the-liquidity-premium/#comment-2205 Preet Tue, 21 Oct 2008 17:23:09 +0000 http://www.wheredoesallmymoneygo.com/?p=909#comment-2205 It will certainly have an effect. There is an equilibrium between indexing and active management, and currently (and probably for the foreseeable future) indexing will win *on average*. As more and more people index, the less efficient the marketplace becomes and eventually a point would be reached where active management can reliably provide value. We probably won't have to worry too much about that in our lifetime though. Keep in mind the most popular cap weighted indices tend to be the most broad and the liquidity of those underlying stocks is pretty good. So the effects will be there, but will be more prevalent for index funds that track the more exotic asset classes (read less liquid). For a broad indexer, it's a nuisance, but probably not cause for abandoning the strategy of indexing. It will certainly have an effect. There is an equilibrium between indexing and active management, and currently (and probably for the foreseeable future) indexing will win *on average*. As more and more people index, the less efficient the marketplace becomes and eventually a point would be reached where active management can reliably provide value. We probably won’t have to worry too much about that in our lifetime though. Keep in mind the most popular cap weighted indices tend to be the most broad and the liquidity of those underlying stocks is pretty good. So the effects will be there, but will be more prevalent for index funds that track the more exotic asset classes (read less liquid). For a broad indexer, it’s a nuisance, but probably not cause for abandoning the strategy of indexing.

]]> By: Jordan Clark http://wheredoesallmymoneygo.com/index-funds-and-the-liquidity-premium/#comment-2204 Jordan Clark Tue, 21 Oct 2008 07:05:56 +0000 http://www.wheredoesallmymoneygo.com/?p=909#comment-2204 Do you think that as indexing becomes more popular (particularly standard cap weighted indexes) that they will become less effective because of this liquidity premium? Do you think that as indexing becomes more popular (particularly standard cap weighted indexes) that they will become less effective because of this liquidity premium?

]]> By: Preet http://wheredoesallmymoneygo.com/index-funds-and-the-liquidity-premium/#comment-2203 Preet Mon, 20 Oct 2008 22:38:56 +0000 http://www.wheredoesallmymoneygo.com/?p=909#comment-2203 @Jordan - Dimensional has professional traders at the helm, yes. They also have portfolio managers too. It was explained to me that if a PM has $50MM to invest, he/she will write up orders for $100MM and tell the traders to execute the best $50MM in trades. There's more to it than that, but if you look at tracking error of DFA funds they can be high, but DFA doesn't care. @Jordan – Dimensional has professional traders at the helm, yes. They also have portfolio managers too. It was explained to me that if a PM has $50MM to invest, he/she will write up orders for $100MM and tell the traders to execute the best $50MM in trades. There’s more to it than that, but if you look at tracking error of DFA funds they can be high, but DFA doesn’t care.

]]> By: Jordan Clark http://wheredoesallmymoneygo.com/index-funds-and-the-liquidity-premium/#comment-2202 Jordan Clark Mon, 20 Oct 2008 18:16:29 +0000 http://www.wheredoesallmymoneygo.com/?p=909#comment-2202 I've read and you told me about Dimensional Fund's have a trading advantage because they buy and sell shares more slowly to avoid this problem. But that makes me wonder, are Dimensional Funds still traded automatically by a computer like most indexes or does an active money manager / trader actually buy and sell the shares to meet their desired targets as they see the best opportunity? Is there a slight bit of active management in there? Thanks, Jordan I’ve read and you told me about Dimensional Fund’s have a trading advantage because they buy and sell shares more slowly to avoid this problem. But that makes me wonder, are Dimensional Funds still traded automatically by a computer like most indexes or does an active money manager / trader actually buy and sell the shares to meet their desired targets as they see the best opportunity? Is there a slight bit of active management in there?

Thanks, Jordan

]]> By: Stocks and Bonds » Blog Archive » Index Funds and the Liquidity Premium http://wheredoesallmymoneygo.com/index-funds-and-the-liquidity-premium/#comment-2201 Stocks and Bonds » Blog Archive » Index Funds and the Liquidity Premium Mon, 20 Oct 2008 07:43:22 +0000 http://www.wheredoesallmymoneygo.com/?p=909#comment-2201 [...] For example, let’s say that the Dow adds a company to the Dow Jones Industrial Average . They make the announcement on January 1 and then set the effective date to be January 10. Since there are significant dollars invested in index …[Continue Reading] [...] [...] For example, let’s say that the Dow adds a company to the Dow Jones Industrial Average . They make the announcement on January 1 and then set the effective date to be January 10. Since there are significant dollars invested in index …[Continue Reading] [...]

]]> By: Index Funds and the Liquidity Premium http://wheredoesallmymoneygo.com/index-funds-and-the-liquidity-premium/#comment-2200 Index Funds and the Liquidity Premium Mon, 20 Oct 2008 01:50:16 +0000 http://www.wheredoesallmymoneygo.com/?p=909#comment-2200 [...] Go to the author’s original blog: Index Funds and the Liquidity Premium [...] [...] Go to the author’s original blog: Index Funds and the Liquidity Premium [...]

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