Question regarding index funds

Mansa's picture
Rank: Monkey | 51

Complete newbie question. As I've understood, when investing in index funds, you're pretty much investing in the market as a whole (or top xx companies). However, what I fail to understand is, instead of paying fees to these index funds (S&P, Vanguard, etc), why can't one just create a portfolio including the same stocks?

Comments (12)

Aug 28, 2019

Transaction costs to enter and maintain the positions (including rebalancing).

Effort to keep up with changes.

Understanding of best ways to enter/exit positions (may not be a vanilla thing sometimes), tax considerations.

All things considered you will struggle to do it cheaper.

    • 1
Aug 28, 2019

Ah very well. That makes sense, thanks.

Aug 29, 2019

Keep in mind costs have also come down significantly, a lot of platforms are offering index funds for free if you just agree to use them as a broker.

Another key point is size, as most people don't have enough money to own market cap weights of every share.

    • 1
Aug 28, 2019

Also since you're buying and selling you're realizing capital gains for tax purposes. You don't have this with an ETF.

    • 1
Aug 29, 2019

Why is this not the case with ETFs?

Learn More

814 questions across 165 hedge funds. 10+ Sample Pitches (Short and Long) with Template Files. The WSO Hedge Fund Interview Prep Course has everything you'll ever need to land the most coveted jobs on the buyside. Learn more.

Aug 29, 2019

Just how tax law works for etfs.

    • 1
Aug 29, 2019

Some ETFs occasionally distribute long-term and short-term capital gains.

    • 1
Aug 29, 2019

In an ETF your not realizing any gains, so it can't be taxed. However, it's not that simple for mutual funds.. not sure why.

Aug 30, 2019
Comment
    • 1