Joe Brennan, the head of the firm’s equity index group, likens managing an index fund to a game of darts—one in which both the player and the target are constantly moving. Money rolls into Vanguard’s funds almost every day, and that cash has to be put to work. The funds must match hundreds of small shifts in their underlying indexes, caused by corporate actions such as acquisitions and share issuances. “We have to deliver perfection every day,” Brennan says. “Sometimes you have to deliver perfection-plus.”
In theory, the best an index fund can do is the return of the benchmark minus the fund’s fees. In reality, a fund faces additional costs from trading and transactions that can widen the gap between the returns of a fund and those of its benchmark. Success or failure is measured in tiny increments. “A basis point to us is a huge deal,” O’Reilly says.
I suppose it's ironic that I feel compelled to share this article now, given my recent departure from the finance sector, but credit where it's due - I had not fully appreciated the complexity and effort involved in maintaining an index fund that simply follows the market. Intuitively, it's a simple instrument that could perhaps be totally automated - but in reality, it takes skill and clever maneuvering to balance things appropriately and leverage various tricks to keep expense ratios at rock-bottom.