Where do passive fees go to?
The consensus is assets are shifting from active to passive. I know Vanguard has a bunch of passive funds that, for example, track the S&P500. They charge a small fee.
Seeing as these are mainly done by algorithms, who is getting paid when the fees continue to shift?
Passive fund management fees are paid to the company managing the fund. There are portfolio managers who are responsible for minimizing tracking error to the benchmark, trading costs, and determining the best way to replicate the index performance, as it is not possible to perfectly replicate the performance of the index. For example, if you're running an S&P 500 fund, do you need to hold all 500 names? Or would holding 100 of the 500 names give you pretty much the same results, but reduce the trading costs to the investors? What should you do if the fund is big, and you can't buy a certain name in one day without pushing up the price a lot vs the last index print? What combination of securities can be allowed for a create or redemption basket each day? These are the sorts of decisions passive managers may consider.
I see, thank you.
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