4 ms·

I'd appreciate if you could expand on that, because I share the same concern as GP. It seems to me that the index fund has to sell a lousy company at a low pric

by ced 10y ago

I'd appreciate if you could expand on that, because I share the same concern as GP. It seems to me that the index fund has to sell a lousy company at a low price (since it's being delisted) and buy a strong one that's being included in the index. Whereas the index, being just a number, can magically perform the swap without taking a hit.

jonknee 10y ago
Sometimes it's OK to sell a lousy company at a low price--it's a lousy company! The beauty of a wide index fund like the S&P is that any one company diving won't hurt you. Companies typically last in the S&P for a long time, so the potential gains of adding companies earlier or selling them at a different time average out. Even Facebook has more than doubled since being added to the S&P and that's the definition of a strong growing company. If you really like a company that is being booted from the S&P you can just go buy it directly after the announcement and you'll most likely be able to pick it up on quite a discount. You can use different indexes if you want to have smaller companies (the Russell 2000 is a good choice), but the whole point of the S&P is that it is made up of established firms. Perhaps lower reward, but also lower risk.
- deleted 10y ago
  [deleted]
- robryan 10y ago
  Is there any data out there on variations? It would be interesting to see how other strategies compare such as buying the next 100 largest market caps outside the S&P 500, also not selling stocks that are removed.
kgwgk 10y ago
The index "magically performs the swap" doing a calculation equivalent to selling at the rebalancing date the stocks that get out of the index (and buying those that replace them) at their price that day.
- ced 10y ago
  Oh, that makes sense. Do you have any reference for it? I found this explanation http://www.investopedia.com/ask/answers/040215/what-does-sp-500-index-measure-and-how-it-calculated.asp http://www.investopedia.com/ask/answers/040215/what-does-sp-..., but it doesn't seem all that trustworthy, and it seems to suggest that S&P doesn't account for survivor bias.

by ced 10y ago

jonknee 10y ago

Sometimes it's OK to sell a lousy company at a low price--it's a lousy company! The beauty of a wide index fund like the S&P is that any one company diving won't hurt you. Companies typically last in the S&P for a long time, so the potential gains of adding companies earlier or selling them at a different time average out. Even Facebook has more than doubled since being added to the S&P and that's the definition of a strong growing company. If you really like a company that is being booted from the S&P you can just go buy it directly after the announcement and you'll most likely be able to pick it up on quite a discount. You can use different indexes if you want to have smaller companies (the Russell 2000 is a good choice), but the whole point of the S&P is that it is made up of established firms. Perhaps lower reward, but also lower risk.

deleted 10y ago
[deleted]
robryan 10y ago
Is there any data out there on variations? It would be interesting to see how other strategies compare such as buying the next 100 largest market caps outside the S&P 500, also not selling stocks that are removed.

kgwgk 10y ago

The index "magically performs the swap" doing a calculation equivalent to selling at the rebalancing date the stocks that get out of the index (and buying those that replace them) at their price that day.

ced 10y ago
Oh, that makes sense. Do you have any reference for it? I found this explanation http://www.investopedia.com/ask/answers/040215/what-does-sp-500-index-measure-and-how-it-calculated.asp http://www.investopedia.com/ask/answers/040215/what-does-sp-..., but it doesn't seem all that trustworthy, and it seems to suggest that S&P doesn't account for survivor bias.