Passive funds are able to expand or contract by buying or selling the underlying stocks in the indexes that are tracked. In many cases, like the larger Vanguard index funds, the mutual fund is attached to an ETF where market participants actively create and redeem baskets of stocks which make up units of the index (which allows Vanguard to push off the tax consequences of trades to those market participants). That activity is able to account for the net of new funds coming in minus funds leaving from fund redemptions. Passive funds do not make more or less when markets rise or fall. Their managers are always making the small management fee which is based on the funds under management in the fund. The average investor is not "making more" when the index fund falls but they are getting that same basket of stocks at a lower price than when the index was higher.SO i wondered how the funds which passively track, say the S&P 500, are able to help the average investor who drip feeds money in.While the common sense view for me, the average saver, is each monthly contribution is able to buy more for the same amount, I understand that, however how is the fund able to increase its profit, if it is only "tracking" the S&P 500. What did the FUND DO with the shares it previously bought ?Did they just hold them, or did they sell them?
...
Active seems very easy to understand, but with the more passive funds I just wondered if anyone could say something on that and how the actual day to day running, the nuts and bolts, of the money controlled by the fund managers.
In situations of extreme market turmoil that could theoretically breakdown for a small, specialized index fund built on illiquid stocks (e.g. stocks from countries which might stop trading or low market cap stocks) but that is not at all the case for the larger index funds which if anything move very little from the smaller market stocks within the index because the index is weighted for market cap.
