My point is that you expect the difference in returns between VTI and VOO to differ by < 1%/yr, about the tracking error that most direct indexing providers claim. Tracking error is a tunable parameter for the algorithms, AQR for example maximizes TLH subject to a constraint that the expected tracking error is < 1%.
I have never heard the claim that direct indexing has lower tracking error than an equivalent index fund. Do you have a source for that? And a source ideally that is not trying to sell something. I've worked in the field of direct indexing and have never heard that. 500 indexes in particular have been optimized to a razor thin tracking error.
My point still stands, these strategies intentionally create tracking error by selling low, and you have to trust their statistical models will handle that well. No model is perfect. Paying higher fees for that does not seem worth it to me, and I have experience working on a direct indexing product for portfolio managers at a prominent financial institution. I didn't find it worth it then and I don't now.
Also, I personally don't care about tracking error of 1%. Yes, VOO has a razor thin tracking error to SPX but as I mention I don't even care if I hold VOO, VTI, or Russell 2k to be honest. There is nothing special about _exactly_ tracking the SPX index weights, any sufficiently diversified market-cap weighted investment is fine by me. I would venture that is a sentiment that is widely shared here.
And I certainly don't believe that the tracking error is more likely to be negative than positive, as that would imply there was a way to beat the market systematically.
Agree DI is not worth the fees most firms charge. I would not pay more than 0.2% and even then it's dependent on tax situation.
Statistics: Posted by nvrmnd — Sat Sep 14, 2024 2:21 am — Replies 39 — Views 1515