S&P 500 ETF Index Fund

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Prudence
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S&P 500 ETF Index Fund

Post by Prudence »

Hope this question makes sense. How closely (precisely) does the price in the fund match or equal the price in the index? For example, if the index price drops 5%, does the ETF fund price drop 5%? If not, is the price movement in the ETF fund consistently less (say 1%) than the price movement in the index (4.9% versus 5.0%)?
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vineviz
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Re: S&P 500 ETF Index Fund

Post by vineviz »

Prudence wrote: Sat May 21, 2022 7:42 am Hope this question makes sense. How closely (precisely) does the price in the fund match or equal the price in the index? For example, if the index price drops 5%, does the ETF fund price drop 5%? If not, is the price movement in the ETF fund consistently less (say 1%) than the price movement in the index (4.9% versus 5.0%)?
Most sources will quote the S&P 500 index value on a price-only basis whereas the S&P 500 index fund investor is also receiving any dividends distributed by the underlying holdings.

So most days the fund return will be ever-so-slightly greater than the index price change, but the difference will likely be imperceptible.
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JoMoney
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Re: S&P 500 ETF Index Fund

Post by JoMoney »

Most index funds (and ETFs) target matching the S&P 500 TR ("Total Return Index"), and only if dividends are reinvested in the fund.
The Total Return index value is different than the S&P 500 Price index (without dividends) that most see quoted in the news.
Over short time periods the ETF price movements day to day will track the price index somewhat close, but the dividend distributions each quarter will wind up being different amounts, and a larger difference will accumulate if you're trying to compare the Fund to the price-only index.
Better comparison is to track the "Total Return" of the fund (with dividends reinvested) to the S&P 500 Total Return index (which has dividends reinvested.)
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dbr
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Re: S&P 500 ETF Index Fund

Post by dbr »

There is a reason the concept of return rather than separate study of price and of dividends provides the simplest and most unified concept of what is going on with an investment.

A first job of anyone contemplating investing is to absorb this concept.
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Re: S&P 500 ETF Index Fund

Post by livesoft »

You asked about price, but then discussed percentage change which are different ways of looking at similar things.

The price per share will be different. You can readily see this:
$360.85 VFIAX
$358.02 VOO
$389.63 SPY

The percentage change per day, week, month, year will track closely as well except when the ticker symbol goes ex-dividend because those ex-dividend dates will be different. Differences could be attributed to investor behavior and expense ratios.

The dividend amounts divided by the share price will be similar if the dividends are paid close in time, but do not have to be. For instance, maybe one ticker makes quarterly dividend payments in Jan, April, July, Oct, and another one makes annual dividend payments in December and another pays quarterly in Mar, Jun, Sep, Dec.

You can download daily closing prices for VOO and VFIAX yourself. Then you can directly observe how closely the prices and/or price changes have "matched" in the past. You can use a spreadsheet to calculation a Correlation Coefficient. Let us know please what you find out. Thanks!
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Prudence
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Re: S&P 500 ETF Index Fund

Post by Prudence »

Let's say I wish to submit a limit order to buy VOO when the S&P 500 index hits, for example, 3875, how is that done, typically, if at all? (I am with Vanguard BTW)
livesoft
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Re: S&P 500 ETF Index Fund

Post by livesoft »

Prudence wrote: Sat May 21, 2022 9:21 am Let's say I wish to submit a limit order to buy VOO when the S&P 500 index hits, for example, 3875, how is that done, typically, if at all? (I am with Vanguard BTW)
Sounds too complicated to me. Why not submit a limit order to buy VOO when VOO hits $3875/3901.36*358.02?
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JoMoney
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Re: S&P 500 ETF Index Fund

Post by JoMoney »

Prudence wrote: Sat May 21, 2022 9:21 am Let's say I wish to submit a limit order to buy VOO when the S&P 500 index hits, for example, 3875, how is that done, typically, if at all? (I am with Vanguard BTW)
I would look at the price history for the S&P 500 for that past day, or week, and if at some point it hit [whatever number] recently, I would submit an order to purchase the fund the next day.
If you're trying to pinpoint an exact price to transact at on some day to day or even week to week movement, I think you're playing a losing game.
Passive investing for the long-haul isn't a precision game, I would recommend you just average your purchases across time and prices rather than trying to execute precision price trades.
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Re: S&P 500 ETF Index Fund

Post by dbr »

Prudence wrote: Sat May 21, 2022 9:21 am Let's say I wish to submit a limit order to buy VOO when the S&P 500 index hits, for example, 3875, how is that done, typically, if at all? (I am with Vanguard BTW)
Why would you want to do that? There might be some particular reason, but not usually.

A more practical purchase process for a huge fund like VOO is to just buy and sell at the market while the market is open.
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darkhorse346
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Re: S&P 500 ETF Index Fund

Post by darkhorse346 »

JoMoney wrote: Sat May 21, 2022 9:46 am
Prudence wrote: Sat May 21, 2022 9:21 am Let's say I wish to submit a limit order to buy VOO when the S&P 500 index hits, for example, 3875, how is that done, typically, if at all? (I am with Vanguard BTW)
I would look at the price history for the S&P 500 for that past day, or week, and if at some point it hit [whatever number] recently, I would submit an order to purchase the fund the next day.
If you're trying to pinpoint an exact price to transact at on some day to day or even week to week movement, I think you're playing a losing game.
Passive investing for the long-haul isn't a precision game, I would recommend you just average your purchases across time and prices rather than trying to execute precision price trades.
I could not agree more with JoMoney's last statement.
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Re: S&P 500 ETF Index Fund

Post by nisiprius »

It is possible that Prudence wants to know how accurately the daily change in the closing price of VOO matches the daily change in the S&P 500 price index.

The executive summary is that the differences can be ignored. They are negligible. And VOO moves just as much as the S&P 500 moves.

I downloaded data from Yahoo! Finance for the year 2021 and did some spreadsheet work to calculate the daily changes in VOO closing price and the S&P closing price.

This is price data only. It ignores dividends. The results would be similar if dividends were included.

If it were perfect, the points on this chart would fall exactly on a straight line. The scattered spread indicates slight differences. However the slope is exactly 1.0, there isn't any consistent tendency for VOO to be consistently larger or smaller than the S&P 500 price index.

Image

The largest absolute difference occurred on between the close of 1/26/2021 and 1/27/2021, when the S&P 500 fell -2.568% but VOO fell -2.426%. Here's a chart of the difference between the daily changes in VOO and the S&P 500.

This phenomenon is called a "premium or discount from NAV' and it happens because the price of an ETF is set by market forces. The "authorized participants" have a financial incentive to keep price equal to NAV because they are allowed to break the ETF into its underlying stocks, and if the price of the ETF is lower than the market value of the stocks in it they will buy the bargain-priced ETF and sell the underlying stocks, which tends to bring the price up. This works very well but not perfectly. It is visible in day-to-day movements but it averages out very quickly over periods of months or years.

Image

The average difference in daily price movement between the two was -0.005%.
Last edited by nisiprius on Sun May 22, 2022 11:37 am, edited 2 times in total.
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livesoft
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Re: S&P 500 ETF Index Fund

Post by livesoft »

nisiprius wrote: Sun May 22, 2022 11:16 amThe largest absolute difference occurred on between the close of 1/26/2021 and 1/27/2021, when the S&P 500 fell -2.568% but VOO fell -2.426%.
And since you did all that, what's the [Pearson] correlation coefficient?
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Re: S&P 500 ETF Index Fund

Post by nisiprius »

livesoft wrote: Sun May 22, 2022 11:21 am
nisiprius wrote: Sun May 22, 2022 11:16 amThe largest absolute difference occurred on between the close of 1/26/2021 and 1/27/2021, when the S&P 500 fell -2.568% but VOO fell -2.426%.
And since you did all that, what's the [Pearson] correlation coefficient?
I think I have to begin by saying that virtually everything I posted already is Really Just Silly. For all practical purposes the behavior of VOO is exactly the same as the S&P 500, price to price and total return to total return.

But I thought it might be responsive to Prudence's question.

But just for laughs, and since as you know it just meant typing in one more formula in one more cell, the (regular normal Pearson) correlation coefficient, ρ, = 0.9986.
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livesoft
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Re: S&P 500 ETF Index Fund

Post by livesoft »

Thank you! One can then say that the price movement of the two is 99.86% pretty much substantially identical. i was gonna guess that it would be at least 0.999... something, but I was wrong.
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Lionel Hutz
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Re: S&P 500 ETF Index Fund

Post by Lionel Hutz »

OP: short answer is yes, the ETF goes exactly where the index goes. You can consider that a constant.

Longer answer is it depends on a particular fund’s expense ratio and tracking error. But the 500 index funds from Vanguard, Fidelity, Schwab, etc, all have absurdly low ERs and also see little to no tracking error.

Go to the price and performance page of VOO on vanguard.com. As of 4/30 the 10 year average annual rate of return for VOO was 13.64%, compared to the S&P 500 index’s 13.67%. The difference is effectively the expense ratio of 3 basis points.
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Re: S&P 500 ETF Index Fund

Post by nisiprius »

livesoft wrote: Sun May 22, 2022 11:54 am Thank you! One can then say that the price movement of the two is 99.86% pretty much substantially identical. i was gonna guess that it would be at least 0.999... something, but I was wrong.
Well, it's only one year. We can't really have fun with this without a long-term rolling 1-year moving average chart so we can look for trends, cycles, autocorrelations, and do technical analysis on it. Maybe it is over 0.999 when the Fed is lowering rates, the yield curve is steep, and Jupiter aligns with Mars. I'll leave that as an exercise for the reader.
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Prudence
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Re: S&P 500 ETF Index Fund

Post by Prudence »

Thanks much!
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