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Is there any product that offers you to at once buy baskets of stocks according to the market at that moment (or some time in the past) like ETF's do but without any re-balancing after?

I think a large part of the cost (TER and/or swap fees) of ETF's is due to the re-balancing. There seems to be a strange obsession with exactly keeping up with the market when there is no real reason to mind small deviations. They might do better or worse but it probably doesn't hugely increase the spread and it should not affect the expectation value at all. The main appeal of ETF's is that it is the easiest way to invest in many stocks at once in order to diversify. But you can do the same by buying one basket once and holding it forever. I also wouldn't mind buying an outdated say "2005" basket if that was when this "stable ETF" happened to start. (And if there would be multiple such funds with different start dates picking different ones each time you invest would help diversify further.)

Does such a product exist or do I really need to buy individual stocks to avoid any fees/losses related to re-balancing?

I am based in the EU and would be most interested in products available to EU residents.

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  • "I think a large part of the cost (TER and/or swap fees) of ETF's is due to the re-balancing" Why do you think that? There is actually very little rebalancing needed for market-cap-weighted index trackers, except.
    – D Stanley
    Commented Feb 20, 2023 at 23:49
  • I would bet (but cannot prove) that the transaction fees (explicit and implicit) would be more than the relatively low fees you pay for passive ETFs.
    – D Stanley
    Commented Feb 20, 2023 at 23:51
  • @DStanley, One time fees (which is what I think you mean with transaction fees) hardly matter over the long time. It is fees that compound that matter. Take for example the relatively low TER of 0.2% p.a. That can easily cost you say 100000* ((1.075)^30 - (1.075-0.002)^30) = 47569. (Here I assumed an average yield of 7.5% and a starting capital of 100000, doesn't actually matter what currency for the math.)
    – Kvothe
    Commented Feb 21, 2023 at 1:51
  • I thought that because it is the only thing the ETF actually has to do after the initial purchase. It is the only ongoing service to the consumer. It is true that you are possibly paying for things like marketing though, so I am not sure.
    – Kvothe
    Commented Feb 21, 2023 at 1:53
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    In US we have Unit Investment Trusts which issue a fixed set of ownership interests of a fixed or nearly-fixed portfolio; I don't know if there's anything similar in EU. This avoids both rebalancing (which costs very little) and ongoing issue/redemption (which is more, but nowhere near all). They still need to maintain shareholder records and distribute both communications and net dividends and gains ('accumulating' investment trusts in US are taxed more so people don't buy them) as well as compliance activities and costs.
    – dave_thompson_085
    Commented Mar 3, 2023 at 4:45

3 Answers 3

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An index fund follows the recipe defined by the company that establishes the index. Many index funds then follow that recipe. Therefore the biggest expenses related to an active fund: research, transaction fees to buy and sell based on the research, and taxes; are avoided with a passive index fund. For indexes like the S&P 500 the number of changes during a typical year are small.

There are costs related to having an account that all funds and fund companies have to have such as website costs, telephone support, computers, utilities, and staff. You would also like those funds to follow all the accounting and government regulations. You also want them to provide quarterly and annual statements.

To keep the expenses low pick an index fund.

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You can take a look at the holdings in an index fund, and replicate it on your own. That of course would incur a lot of transaction fees, so in practice it's not feasible for most investors.

Other than that, you would miss any new companies that get added to the index. And when you get dividends, to avoid deviating too much from the market, you should be reinvesting them in all of your holdings, not just in the company issuing the dividend. More transaction fees there.

Funds have their own transaction fees (generally not included in their expense ratio), but they're much smaller because of economies of scale, and they're partially offset by security lending income. When you look at high-quality index funds, you'll see that they have minimal tracking error, the difference between real and index returns.

Saving on transaction fees, monitoring companies coming in and out of the index, making it easy to reinvest dividends, and saving you time/hassle, all for ~0.05% is a fantastic deal.

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  • It might be the best deal available. I wouldn't say fantastic. The 0.05% sounds small but can add up to a lot of money over many years. Direct indexing seems competitive (one time transactions fees matter a lot less than recurring fees). It is just a bit of a hassle. (Security lending is of course also possible when owning the stocks directly.) Missing out on some companies means being slightly less diversified (larger variance) but shouldn't affect your expected return. It is a shame no company offers to automate direct indexing without recurring fees (only one time transaction fees).
    – Kvothe
    Commented Mar 2, 2023 at 0:09
  • The public markets worldwide have about 9000 listed companies. Let's say you want to only buy the top 3000, which already misses out on a lot of small-cap diversification. At $5 per trade, that would be $15,000. If you held that over 40 years without further trades, you would need a starting portfolio of $750,000 for that to match a 0.05% expense ratio. That doesn't account for the fact that by putting costs up front, you miss out on compounding on those fees (on average, for 20 years), so it's likely a much larger figure.
    – Earth
    Commented Mar 2, 2023 at 17:41
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    In that scenario, you also don't get newly listed companies, which over 40 years can completely change the market. You don't get to properly reinvest dividends without paying $15k again. And you have no way to add any money to your portfolio without again paying $15k. And that still doesn't account for selling your shares. You have to squint very hard to think that index funds are not a great deal for individual investors.
    – Earth
    Commented Mar 2, 2023 at 17:44
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Rewriting a bit:

Low cost traditional index funds have no transaction costs, which makes rebalancing free (except for capital gains tax).

The biggest advantage ETFs have, really, is that traditional funds may be less tax-efficient since you pay tax on their dividends each year.

It's probably a good idea to run some numbers on both options and see how that difference affects you. I've seen no reason to move to ETFs.

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  • I am not sure I understand your answer. Are you saying there exist index funds with little to no fees? ETFs generally have 0.05%-0.25% Total Expense Ratio's (TER) depending on what index it is following. Do you know something with lesser fees? (These fees are of course already reasonably low but can still easily accumulate to say over 50000$ over say 30 years. If I can avoid these fees at only a small cost to my diversification that would be very interesting.)
    – Kvothe
    Commented Feb 20, 2023 at 13:43
  • Or are you saying the fees that are there are for something else than rebalancing? (It is the only thing the ETF does really.)
    – Kvothe
    Commented Feb 20, 2023 at 13:44
  • @Kvothe: There are quite a number of well-diversified options where the expense ratio is in the 0.02-0.04%/year range.
    – Ben Voigt
    Commented Feb 20, 2023 at 16:04
  • @BenVoigt, are these also available in Europe? At Interactive Brokers (Ireland) for example I haven't found any stock ETF below 0.05%. I have heard there are some US ones that are not available in Europe due to some regulations. Perhaps these are those?
    – Kvothe
    Commented Feb 20, 2023 at 17:27
  • @keshlam, can you give an example? What is a traditional index fund, an actively managed one? What is its TER? Can they be bought in Europe?
    – Kvothe
    Commented Feb 20, 2023 at 17:31

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