[kevindong]

> What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors?

It already is "open sourced". Vanguard precisely discloses what's in each of their funds already [0].

The issue with independent investors perfectly replicating the securities underlying the index funds is that the vast majority of investors simply don't have enough capital to replicate the underlying components of the fund. Meaning, the typical investment amount of a randomly chosen investor cannot buy enough shares in proportion to each other to be as diversified as a massive $100+ billion fund. That's before discussing the issues with maintaining a balanced portfolio.

> Where each investor owns their portfolio outright and adjustments to the portfolio are made automatically by a free index manager bot that runs the simple algorithm an index fund manager like Vanguard would.

If you had enough capital and trusted such a bot enough, it's not hard. But the vast majority of people will never have enough capital.

[0]: See about 40% of the way through this PDF for the securities behind Vanguard's Total Stock Market Index Fund: https://personal.vanguard.com/funds/reports/q850.pdf?2210151...

[robocat]

Presumably if you replicate the holdings you are lagging their buys and sells. The lag could cost more than the fees so you might as well but the fund instead of replicating...

[njarboe]

With free trades (now in everywhere) and fractional share purchases(robinhood), I think buying your own S&P500 fund would be possible with little capital ($1000?), and easy if your broker set up the software on their system to do that. I would not be surprised if robinhood already has this feature.

[PhantomGremlin]

Why not just buy SPY? The expense ratio is only 0.09% and it's one security to track.

Given $1000 to invest, I can't fathom trying to individually own an average of $2 worth of each of 500 companies. And that doesn't even begin to cover it. Because the S&P 500 is market cap weighted, you would need to own $45.70 of AAPL, the top company. I don't know what the 500th stock is, but you'd probably need to own about $0.10 of it.

Even if trades themselves are "free", you still need to pay something like $0.13 per trade in SEC fees. So you are paying about a 100% commission on each of the smallest stocks you buy. And then another 100% commission when those stocks fall out of the index and you sell.

Just buy SPY. There are many good reasons that it has grown to $307 billion in net assets.

[wutbrodo]

There are robo advisors who will buy the individual securities in indices for you, as long as you have enough invested with them (50k? I forget). But the only advantage over simply buying the fund AFAIK is being able to tax loss harvest from the higher volatility of individual securities. Eg, if your two-security index has stock A go down 5% and stock B go up 6%,an index fund would simoly go up 1% while the actual basket would allow harvesting the losses from stock A.

As far as I can tell, this is a fairly minor advantage, and if I wasn't using a robo-advisor, i certainly wouldn't be managing the basket directly just for this ability.