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[dupe] Ask HN: Passive income ideas for solo developers?
254 points by thakobyan on June 18, 2017 | hide | past | favorite | 123 comments
I'm a web developer who is looking for passive income ideas. I'm actively looking for income sources that fit well to my skills.

Do you have any recommendations, ideas, stories?


Affiliate marketing.

I'm making about $10k/month from several sites I don't really update. The trick is to install yourself in some customer acquisition path no one else figured out. When I started my first attempt I didn't even expect to make the domain registration fee back over a year, I did it mostly out of boredom.

Don't look out for affiliate solutions specifically, but keep an eye out for them. Especially when you found some product/service that's hard to find, but very valuable - do they have an affiliate program? Great, that's your chance - especially because, being a customer, you probably know better than them what's their main selling point!

No more details than that, sorry. I'm not trying to sell you anything. In affiliate marketing be super wary of those that try, most likely that's their real income source.

It's mostly a parasitic income but sadly that's how current economy is, honest productive work pays the least relative to what it brings. Mostly thanks to central banks that artificially prevented a giant systemic reset.

This sounds very cool. What level of detail are your sites? Are they static sites with your affiliate links on the front page? Where do you find your affiliates that are buying leads?

I'm very interested in this and am trying to figure out how to do just a basic affiliate site setup.

These are all the secret sauce that very few affiliates will tell you. As OP said, you have to find your own unique niche.

If you write convertible copy, you can find an existing affiliate chain and try to use that to leverage your advantage. Otherwise, I recommend trying something that's out there, realize you won't be able to compete in your first niche (too much competition), then use that to learn.

Your first ROI might be 25%. Try again, find another niche, until you find the right one. This is classic explore/exploit game theory (every well publicized channel, e.g. the "Bingo Card Creator" of affiliate world) will be Red Queen'd to death.

note - not "great" copy, but copy that converts! (Or maybe you make landers that convert like crazy, or you have enough money to buy a ton of traffic and conversion optimize like crazy)

Cool. Thanks for the response. Are there any good resources to go to learn this stuff? Or any guidance on the basics?

Neil Patel is a good first place to start to learn. Then you realize all his (vanity) metrics are just measures of your competition. So I went to Warriorforum.com to read what my competition was saying.

After that, I realized it was all about the basics + a niche. you need to know the fundamentals of "buy traffic, convert traffic to business goal, collect money for successful business outcome", but that was table stakes.

Once you know the mechanics of the game, it's up to you to niche/exploit. You're not going to make money doing what everyone else does, so if you're asking for advice instead of trying your own thing, you're already losing.

Find a product that you like owning but have difficulty buying. Identify and fix those pain points.

I don't think it is "parasitic" if you are actually getting something people need/would want/wish they knew about into their hands.

No, parasitic is accurate for most affiliate sites. The majority are content mills who are better at SEO than the retailers. People google "best foobarbaz" when doing christmas shopping and end up at an affiliate content mill. If the affiliate content mill didn't exist, google would have taken them straight to amazon. This is highly evident by the numbers shared in affiliate forums - 90% of annual revenue often comes from November and December. (If you have useful content and are appreciated by the community, this does not happen.)

Then there are blogs who happen to use affiliate links. These guys are content creators who don't want to show ads. If you go this route you have to be careful to avoid becoming (or looking like) a content mill. But generally these are people doing good, tasteful work and only writing about products they've actually bought and put through the wringer.

Finally, in distant third, are the companies affiliating because they want to fix the online shopping experience but don't have the capital to compete directly. Camelcamelcamel is the best example of this. My own site is also a fair example.

There are many shades of gray in the affiliate spectrum. It mostly comes down to how many "best practices" (aka dark patterns, like making all images go to affiliate links instead of larger versions) you choose to use. If someone says their operation is parasitic, they are probably right.

How long did it take you get to that point?

About three years.

Any advice on how to find the niche?

> Don't look out for affiliate solutions specifically, but keep an eye out for them. Especially when you found some product/service that's hard to find, but very valuable - do they have an affiliate program?

Are you suggesting to look at at a high-priced product that doesn't have an affiliate program, and cut a deal with the business owner to promote their products?

In my case I was searching for something niche very hard and nearly couldn't find it. It turned out it exists, but was marketed to a drastically different market and I was using 'alien' terms, so to speak. I think I noticed a small 'affiliates' link in the footer and got the idea to market to people starting from my starting point. Wasn't sure if there was even one, turned out there are thousands.

I don't think you can specifically look for a niche. That's how you end up doing the exact same thing thousands different marketers are doing. Just be able to recognize the opportunity when it randomly presents itself.

Very clever. Sounds like this strategy is for an ultra specialised product, that you have need of yourself, so that you can write good copy about and which is not sold through the usual channels like Amazon etc.

Thanks for sharing. I'll rack my brains and see if I can apply this myself. I'd love to read a blog post about this strategy, if that's something you'd ever feel like sharing (without giving away your secret sauce of course.)

Would you be able to share one of your pages? I'm curious how much content you have on a page vs just keyword stuffing and bloat.

Nice try.

sounds like clickbait-y or spam

My definition of "passive income" is income for which you need not work more than five hours a week. Some people are stricter and define it to mean no work each week. With very few exceptions, there are no opportunities which will actually end up being passive income for you just because you're a web developer. There are several opportunities to increase your income, but it's rare that they are fully automatable (or even feasible as a part time venture).

One option is running a successful service company; this is by definition not passive unless you own it and don't need to actively manage it. So that's out.

Likewise, a productized SaaS company is not passive unless you have very minimal customer support requirements, new feature development and marketing to do. That's overwhelmingly unlikely (if you look through the routine threads asking HN for SaaS success stories, you don't typically find instances where there is a minimal time commitment).

I'm not trying to discourage you from developing a successful stream of income. I'm just trying to push back against the idea that you can reliably generate income passively using web development skills. There are a few options that can require very little time (in theory, I still don't think you'll easily get there in practice). But I think the only one that will leverage web development and still be mostly passive is running a network of websites monetized through ads that have low effort content. Other than that, maybe write a useful ebook and promote it until it has excellent SEO and referrals.

I don't completely agree....

Passive Income the easy way: Invest money in an S&P 500 Index fund. Routine dividends are easily count as passive income. You need a lot invested for this to be a significant amount, though.

The reason this may be easier for a web developer than, say, a retail cashier is that the web developer most likely has a higher salary.

--- Owning a company, whether services company or SaaS is also another way to get passive income. However, unless you have huge capitol to hire folks to do the work, or put a lot a time in to build the company [and then replace yourself] it may not be practical; and it definitely isn't immediate.


I've done the writing route, writing, and self-publishing, technical programming books. It is a great way for passive income. Once it is published you get residual income each month.

Much to my surprise, I've found that programming books have a much longer tail than I would have expected.

how much do the books make you, and how much have they made you, over how long? thought about writing, but not sure if it would be worth it

I'm still not sure if it is worth it as a stand alone venture. :ha, ha: I have gotten consulting clients through my self published efforts, which pays off in dividends.

Generally I make around $50 a month. I'm not laughing all the way to the bank; but it isn't nothing.

I assume most self published [technical] authors are in the same boat financially. There are a few 'lottery winners' out there, such as ngBook, but most probably trickle along.

I'd have to look up dates and run financial reports to figure out how long and how much. I don't spend too much time running the numbers for that aspect of my business.

I published "Life After Flex" which was explicitly targeted to Flex Developers who want to learn "HTML5" applications, primarily focused on AngularJS. That used the "Authority" model; so high price with lots of extras.

I retooled that into the "LearnWith" series which builds the same app in different technologies. It is intended to be "no frills" approach and I sell the books for $6.99 through Gumroad and Amazon.

I'm copy editing the Angular 4 version of it now; and with any luck I'll be working on a React [or maybe Vue?] version before end of year.

if you look through the routine threads asking HN for SaaS success stories, you don't typically find instances where there is a minimal time commitment

Here's the front page Ask HN from 3 weeks ago where we all spent a couple days talking about examples of businesses doing exactly that:


It's entirely possible to build a SaaS that takes close to zero of your steady-state time if you design it to do so from the start.

Thanks for the great answer. Maybe I should have mentioned "side income" not "passive income".

Let's start by reframing your thinking: which business problems can you reliably solve for companies that value time more than money by leveraging web development?

If you already have a full time job, you might be disallowed from side income derived from services (i.e. consulting). If you don't have such a provision, you can start by selling your services for web development to companies that need them. Search through patio11 and tptacek's comments to read more about this route.

In my opinion consulting is easier than productized software (even if it's less straightforward sometimes). But you can more easily scale up a software product and reduce your time commitment for it. So if that appeals to you, then you should start by looking at what domain knowledge you have.

Can you really maintain a consulting service if you have your 9-5 weekdays unavailable? Even on sites like Elance it seems like many clients expect you to be available during the day for Skype calls.

Now we're talking ... so what sort of web dev do you do? For a business, in an agency, for your own clients? It's all about solving problems. What problems have you solved for them or yourself that you can automate?

I work full-time but want to start something on the side. I've built couple projects in the past but nothing that major that generates income.

We launched https://emailoctopus.com around 3 years ago as a side project. The most difficult thing with launching a SaaS is the early days, where you've spent hours upon hours building the app and are only bringing in £400 a month.

We stuck with it though and today have a full-time team of 5 working on the app, are paying ourselves a similar wage to what we were earning in our full-time jobs and most importantly have almost complete ownership of our work-life balance.

I'd really recommend a SaaS business if you are after recurring, side revenue and as mentioned before https://www.oppslist.com/ is a great place to get some initial ideas. Your marketing skills will improve too - just stick with it for a year or so if you do go that route!

How do you even get started with building (and then marketing) a SaaS? Can you share some helpful resources?

We did write an article here: https://medium.com/emailoctopus/the-road-to-one-billion-emai...

Although in short, we built a product to serve our own need, launched it totally free for everyone and ended up gaining around 2000 users very quickly. Within a year we had grown MRR to the £3k mark, so we contracted alongside running this 2 days a week. Now, another further year on we're full-time with a few employees.

Could you elaborate on what you mean by "almost complete control of our work-life balance means". How specifically does this impact your working week/day?

So we work the hours which work for us now and are free to work from anywhere in the world. For example, I'm not an early riser, so start work at 10am and if I want to leave early, I do. We're very relaxed on exact hours as long as we hit our commitments for the week, which we outline on a Monday.

Thank you! Very helpful. Never heard of oppslist but excited to check it out.

Hey Thakobyan! Cory@oppslist.com here. I've got around 2000+ of these "saas" ideas, so feel free to drop me a line if you're looking for something in a specific field!

I made an open source search engine that searches her user curated mind maps on the web. Here is the search :


Since everything is open source and I can't run ads or add any sponsored content, the only way to support it is through Patreon. I think it is a pretty cool idea and solves a big problem of not knowing how how best to start learning a topic or what learning some topic X is.

I hope people will find it useful.

I'm a little late commenting but...

> Since everything is open source and I can't run ads or add any sponsored content, the only way to support it is through Patreon. I think it is a pretty cool idea and solves a big problem of not knowing how how best to start learning a topic or what learning some topic X is.

How so? There is nothing in the open source model that prohibits this. Is it because it because you feel that the type of people who are interested in open source will get angry if you have ads?

Yeah, I think ads can't really work well in our search + most users run adblocks already. We are still experimenting with ways we can monetise this project however in a way that doesn't reduce the value and quality of the product.

I was starting to build something similar but your execution seems better, thank you!

This is an awesome site, thank you!

Awesome is right. Would you link your patreon here, please?

Not OP but got it from the GitHub repo: https://www.patreon.com/learnanything

Very cool!

The thing with passive income is: You only get to passive income if you love to work on a specific problem. I think, most solo founders who are successful today didn’t do it for the money. They found a problem and wanted to work on it, regardless of the payoff. Sure, a nice payoff would’ve been great, but that wasn’t the initial motivation.

I think the psychological aspects are vastly underestimated when people try to find ideas for a business. There’s a reason why startup land says don’t make a fuzz about ideas. Few people are interested in implementing solutions for problems that they don’t care about. Caring about the problem helps a lot to get through times when it all seems too much and you still don’t see any success.

I enjoy reading those idea lists, but I never implemented one and I think they’re worthless mostly, because there’s no emotional involvment from me.

Not sure that's iron-clad true - I doubt patio11 "loved working on" Bingo cards or appointment reminders, and I'm reasonably sure neither were problems he was trying to solve for himself.

Better ask him, but I suspect he did enjoy it to some extend. I doubt he did it only as a money grab, but rather because of some interest in the problem. Maybe not the domain of bingo cards itself for too long, but everything else that comes with that: writing, explaining the product to teachers, SEO, marketing, customer support, automating everything.

There were probably higher-productivity ways to get money than writing bingo card creation software for elementary schoolteachers. To put it mildly.

I didn't have "an itch" for either problem myself but I did really, really love throwing myself into learning how to run a business. BCC felt like a relatively low-risk way to do that. (AR didn't ever feel particularly low-risk -- and the stresses implied by that are one reason why I'm glad I don't run it anymore -- but that is neither here nor there.)

May be you need to look into https://www.indiehackers.com. The site is great that it contains all the information / stories / ideas, about developers who sell their projects!

I had some passive income sources earlier but they all did not last forever and they took a lot of work to setup plus a quite a few never made any income.

Don't fall for the ease implied by the word passive. This is a concept designed to sell self help books and promote gurus.

What you can do as a software developer to make money requires effort and chasing something that does not is fooling oneself.

A better perspective is to ask what can I do to generate the most income; and maybe put up with a bunch of obvious and boring answers.

If you're in tech, you've probably used an Atlassian product (e.g., JIRA, Confluence, Bitbucket).

Make an Atlassian add-on!

It's been a (mostly) solo gig for me so far. Two months ago my own add-on happened to do $8K in sales within a 30-day window. That put me around the 150th position on this ranking (add-ons ranked by last 30 days of sales):


That's turned out to be effectively a waste of time for me.

What's your add-on? It took me almost 12 months of working on mine (probably 500-600 hours) before it started to make money.

I guess that depends on the plugin?

Niiiiice one. They don't all make money but there has been around $225-250m in revenues in the marketplace so someone is making money.

Oh you work at Atlassian! I wonder if the PR I recently had accepted into "Auto Unapprove Plugin" will affect you! (I get the sense Atlassian uses that add-on internally).


(Issue #15 in particular - base unapprove on: git diff target...source | git patch-id).

Solve one of these with a SaaS solution:


In addition to https://www.oppslist.com (as some have already mentioned), check out https://www.indiehackers.com. Although not all the businesses are entirely passive per se, there are a lot of interesting stories and projects that you might find inspiring.

If you are not a web developer you may consider building an app. I find the Mac App Store to be less competitive than the iOS one.

Personally, I released my app two months ago: https://itunes.apple.com/us/app/easygit/id1228242832?mt=12

I am iOS developer and it has become a pretty tough market to crack. Can you share some more thoughts on the MAc App store. Is it worth investing in Mac app development?. Thanks.

Anecdotally it seems like the Mac App Store is easier to break into and generate a steady income, at least for a while. Not sure if it is because of less competition, or just mac users being more willing to spend money for apps than iOS users. Keep in mind though that the market is at least one order of magnitude smaller than the iOS Store, so it may be more difficult to go further than side-project level.

Thank you

What do you think about it revenue-wise? Are you pulling decent money from the MAS?

This topic has been covered extensively on HN. Check out some of the past submissions:


OT, but could the [dupe] tag become a link to the duplicate topic or something? It's usually in a comment somewhere, but would be nice with the official explaination/cause somewhere consistent.

Publish some books on the knowledge you've accrued.

While this is fun if you like writing, it's not really a reliable or efficient source of income.

It takes me about 6 to 10 months to write a tech book in my spare time, and unless one hits the popularity jackpot at some point, I don't think they will pay off financially.

(But published books do make a very nice line on a CV)

I do this. It's hard to grow at first and there's plenty of ongoing marketing work but after 2 years I could already go full time if I didn't insist on living in SF.

It's a fun little cottage industry.

Any more details on how to pick the right format for the book, how to publish, market, etc?

There's a lot out there. I'd start by reading Authority by Nathan Barry

You can find lots of ideas just checking http://flippa.com You can even buy an established website from there and try to grow revenue but it would be wise to be careful about metrics provided by sellers though.

Aside from the obvious: code something that solves a real problem, you need someone to go out and sell it. Make him/her a partner/founder. That formula worked for me.

Not necessarily passive, but an idea I was reminded of recently might be worth pursuing.

Matching students with exam proctors.

Online education is the future (and to a large extent the present!). A common requirement for students is to find an exam proctor. I had to do this myself. I was lucky enough to know someone that qualified (a high school teacher) but a lot of people won't. Googling for a proctor service didn't help much. There's an obvious need there.

The easiest way to find proctors is at http://www.ncta-testing.org/ . Typically they are locate at community colleges and universities.

Should mention this was in Australasia (NZ and then Australia).

Besides, even here there are a lot of people that qualify (anyone that works as an administrator at a university for instance). The thing is, there isn't much in the way of structured services (unless you happen to be doing a large certification course where others nearby also are).

Passive bitcoin lending, and bitcoin secured lending. You can partially automate it, there are scripts on github to automatically manage your lending. You are exposed to the full volatility of crypto price swings though.

Open a cheap investment account (e.g. Interactive Brokers) and invest in cheap ETFs (e.g. Vanguard Total World Stock and/or Vanguard Total Bond Market - in proportions 70%/30%) until you have 25*your yearly expenses (that usually means 10-12 years of investing, when you save 50% of your salary). After that point, you're FI, you can withdraw (max) 4% a year and live off from returns from your investments ad infinitum.

I am following a similar strategy, but I am invested in other instruments, too. I have everything from bond ladders to leveraged REITs. I invest 65% of my post-tax income and 100% of post-tax bonuses. I use Schwab, though.

Schwab is now beating Vanguard on fees on their equivalents of Vanguard funds: https://www.schwab.com/public/schwab/nn/m/indexfunds.html?va...

Schwab also just recently lowered its commissions... a lot. Equities trades are now $4.95 flat whether you buy or sell 1 share or 1,000,000 shares. Fidelity also lowered their commissions to match Schwab. Everyone else is still higher, including IB depending on your volume.

(Disclaimer: no relation to Schwab other than that I am an extremely happy customer)

I would also recommend affiliate marketing. Easiest to start because you don't need a huge investmemt to get started etc. Check out http://marketingonlinecentral.com/internet-jetset-review/ Hope this helps you out!

I have made way more money from my bitcoin capital gains than from anything else I did for the last 3 years.

Congrats, but that's like mentioning that you happened to be a snapchat employee or you won the lottery. It's useless advice for someone looking for ideas now.

Are you sure it's useless? Ethereum seemed to have a jump recently, and maybe Monero is just in front of a jump.

I don't know why the original post got down-voted. Crytocurrency is still in its infancy. Much money can be made from it. And it definitely qualifies as "passive".

Early bitcoin winners had the advantage of hardly anyone knowing about or understanding what it was. So they had a kind of inside knowledge within the group of people who understood it enough to imagine the potential.

Now, everyone (ie professional investors) knows about cryptocurrency so you have no advantage over them and you're just gambling.

It was always gambling, especially at the start. Bitcoins are still making major gains at the moment.

Here's a strategy that works: Take an amount of money that you own but can miss. This means that you won't go totally crazy when you lose it all. Put that amount in Bitoin, Ethereum and Monero for example. Let it sit there for the next 10 years.

In 10 years, it's either $0 and you lost it all, or it became the best investment you ever did. And that is counted in factors, not percentages.

Worked out so far.

It's effectively gambling on the future of various currencies. It's no different than day trading or forex at this point so it's not really a good way to get 'passive income' since it can very easily turn into 'passive losses'.

Most suggestions here are gambling. Things that are low risk don't give much return. If you want it to be passive, you either need to have a lot of money/time or take risk and be lucky.

My money is on Ardor / NXT team.. I honestly think their platform will eclipse Ether AND Bitcoin one day--it's much stronger and more secure.

I've mentioned this before [1] but affiliate sites work, particularly if you are already doing web dev.

[1] https://news.ycombinator.com/item?id=14473272


take on 1-month or less web related projects on upwork and the like?

My account was recently suspended from Upwork because I was applying for more number of jobs without landing at any. When I sent a mail to Upwork support, they said they cannot help me once it is suspended. Currently I'm trying to find some work on freelancer.com. Do you know any other similar websites for freelancing for beginners?

there's also remote.com

Work in some unrelated industry and find out enough to know their problems then make a web app that helps them. With businesses or professionals as customers, you can charge much more and with such a uncrowded niche, you can do a relatively poor job.

An example, I've seen is a site for property managers to share information with their landlord customers. It's just a CRUD app with a list of transactions, area to post pdfs of invoices, etc. The web app is old, ugly and basic but I bet they're collecting big regular subscription payments from their customers who can't justify hiring their own web developer and building and maintaining their own site.

The key here is having knowledge that most web developers don't have. It's going to be an uphill battle trying to sell golf clubs or restaurant bookings or solve any problems that everybody and their dog understands.

how's that passive ?

As someone said bellow, the stock market is a good place to look and develop a quantitative trading systems, it is almost free to build and back test and once done, will run on autopilot, but you'll need capital to invest... Good luck!

Needing "Good luck" defeats the whole purpose if these kinds of threads. QT is a complete waste of time as most of the skill you will acquire revolves around hopelessly looking for patterns that don't exist within time series. Flag formation? Predictive capability: zero. Trend: zero. Congestion: zero. Most positions win? Great. The one that doesn't will take it all back.

I do agree that candle formations like head and shoulders, bull flags, etc do not work in the market (at least for me), but I don't quite get your point on why QT is a waste of time, since there are a lot of systems and people big and small beating the market on a regular basis, so let me give you 1 quote from Warren Buffett:

“Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.”

My point is, QT methods have zero predictive capability, and are a complete waste of time and will not give you any usable skills in any other field, either.

Opportunity trading (what Mr. Warren and others who occasionally profit from the market do) on the other hand, are entirely different animals.

Not sure what you didn't understand.

Agree to disagree, a lot of examples, best is probably Renaissance Technologies

And they had 3bn$ to begin with. Those pockets are deep enough to pull a martingale. And this thread is about a web developer asking how to make side income. Still don't see the contrast?

Nope, I started small years ago and have a great success, so if I can do it as a side project, he can do it as well, it's not a open hearth surgery...

Yes, it is so easy to get rich quick using QT, now I feel sorry I ever doubted it.

It's not easy, but if you put the time end effort, it is quite possible...

These kinds of statements unfortunately depend on your personal credibility. Anyone can claim to be doing anything in order to feel good about themselves. I'd suggest keeping this to a circle of people who personally know you and know that this is true, not a bunch of strangers who will doubt your every word.

You are probably right, but still I find it very amusing, if I was saying I am making the same amount of money with some sort of referral web site market dubious products, everyone here would have been very excited, but as soon as I mention the Stock Market I am getting down voted...

This explains a lot: Wall Street is definitely succeeding brainwashing even the smart people that investing is something very complicated and everyone should be happy with average returns... Years ago the rage were the mutual funds, now are the passive buy and hold index funds (don’t get me wrong I have one long-term strategy investing in SPY, but making twice the average)

No good deed goes unpunished here I guess... Not that I care very much, since I am not selling anything or peddling a personal blog for example... But what opens my eyes it the realization, that those people that dismiss the idea about making money from the stock market are the ones I am making money from one way or another, in the end it is a zero sum game, so if you are not making money in the stock market you are probably loosing one way or another...

The difference between these (good) examples on HN

https://news.ycombinator.com/item?id=8499305 https://news.ycombinator.com/item?id=11887147

And your so-called good behavior in hn is; you show no substance whereas they provide something to start hacking.

Perhaps this helps?

Thanks, I did check both examples and what it strikes me about them and other similar "good" examples on HN are they are usually based on failed strategies or technologies, so basically the discussions are pointless...

All in all, the YCombinator is a for profit corporation, which by censorship and bullying (or so called "down voting") is shaping the people on Hacker News to frown upon small or lifestyle businesses, because they need the flock of dreamers to get their underpaid workers to work on mostly failed startups... They are not out to help you or anybody else, this is how they make the money in the end and they go after everyone who threatens their business model... If you are to remember just one thing from my short stint around here, please remember this: They need you, but you do not need them!

Good luck!

Well, no, you did not look at them.

First link doesn't constitute a trading strategy at all. Again, all rant and no substance. I'm starting to think asking for more is pointless after this moment. I give up.

I said failed strategies or technologies, but better would be failed ideas, which is precisely the same point...

Adsense / content sites. Automated saas business. Stock market.

The first two are sensible suggestions, but playing the stock market is essentially gambling. Most people would be better off investing in index funds.

I think the parent meant index funds. Index funds are the only kind of market participation that you can reasonably call "passive."

I've recently heard doubts that index funds are a good investment. They're meant to be "investing in the US market", but aren't they really "investing in the Vanguard/whatever ETF"?

Basically, doesn't the value of index funds reflect how much people think index funds will rise in value?

Index fund prices are tied to an index, hence the name. If the DOW goes up for a DOW index fund that fund will increase in value proportionally. Vanguard gets paid for managing the fund.

Ah, so the value of an ETF isn't what someone else is willing to pay for it, like a stock?

EDIT: Apparently you can exchange the ETF for the underlying securities at any point, and vice versa, so the ETF's price can't diverge much.

It's not so much that you can exchange a share of an ETF for micro-shares of the underlying security, but that the ETFs themselves keep their assets in the underlying and if it gets out of balance professional investors will short one side and go long the other and make the difference -- a form of arbitrage.

Specifically, in the case of SPY, if the ETF was trading higher than the underlying, they would short the ETF and go long an appropriate number of shares of each of the 500 companies. The difference in the price is their profit. The very act of doing this brings the two prices inline and eventually you sell both sides and close the position for realized gains.

Brokers let you do these transactions atomically. Of course, for transaction fees alone, this is not a strategy available to retail investors.

This is correct; Authorized Participants are the ones who exchange baskets of securities. It isn't really possible for individuals to exchange shares directly with the fund manager, but that's not an issue because the secondary market prices are kept reasonably close due to the professionals. The amount you can expect to lose relative to NAV (the actual value of your shares) is around half the bid-ask spread at the time you buy/sell.

It also helps with tax efficiency since the creation/redemption process allows for shares with significant appreciation to be retired.

I see, thank you for the clarification.

Not really the ETFs are generally backed by the actual securities they represent. They may deviate from market value a bit intraday, but those deviations are picked up by special arbitrageurs and quickly eliminated.


Ah I see, thanks, I wasn't aware of that mechanism. So you can basically exchange the ETF for the actual held securities at any point, which keeps the price near that of the securities, pretty clever.

The thought is that with index funds, you're invested in enough of the market that you don't have to pick winners and losers and you get rebalanced as well.

It would be interesting to study the market cap effect of going from #501 to #500 in the S&P ratings.

If you think the entire market is overbought, then they might not provide the best returns over the short term. However, most people are very bad at timing the market or picking the strongest companies that will thrive in a down market.

There S&P 500 is selected by a committee so there is no #501.

My point is that there is probably a bump going in and a hit falling out. This wikipedia article (https://en.wikipedia.org/wiki/List_of_S%26P_500_companies) shows the additions and removals. I am curious about the distortive effects of demand from the S&P 500 as a proxy for the effects of passive investing.

Technically there are 505 due to dual-share classes for 5 of the securities in the index.

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