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> Actually if this reclassification moves markets it will not be to due to passive investing. Sure, its easy to show where your thinking went wrong here... Sa

> Actually if this reclassification moves markets it will not be to due to passive investing. Sure, its easy to show where your thinking went wrong here... Say there is one passive ETF for the US market and the US market is composed of 2 sectors, Finance and Tech that are balanced at say 60-40 split. There is now a 3rd sector call REITS that is 10 percent of the market. The ETF now has to transfer from a 60-40 split to a split where 10% is now attributed to REITs. This 10% comes at the expense of other sectors, which is how a passive ETF can move markets. There have been hedge funds positioning themselves for this move for 6 months now.

kgwgk 10y ago
The 10% attributed to REITs is coming directly from the 60% in Finance. Because it was actually composed of 50% Finance/NonREITs + 10% Finance/REITs.
- chollida1 10y ago
  > The 10% attributed to REITs is coming directly from the 60% in Finance. Yes, that is correct but I think I'm still failing to help you understand. Previous to the re-balance the 60% of finance is dominated by old fiance companies at the expense of REITS such that REITS only make up say 3% of the entire ETF. After the re-balance REIT's are now a much larger portion of the ETF, 10%, than they were before due to them being their own category and the large fiance companies dominating the fiance category before the split. The reason why REITS are now bigger is the same as the reason for giving them their own category. Propulsive they were underrepresented due to being lumped in with fiance. Now that they have their own category there is more demand for them, hence they now have a larger percentage of the ETF. Does this help you understand?
  - kgwgk 10y ago
    >Previous to the re-balance the 60% of finance is dominated by old finance companies at the expense of REITS such that REITS only make up say 3% of the entire ETF No, they make 10% of the entire ETF. Otherwise your example doesn't make sense. >After the re-balance REIT's are now a much larger portion of the ETF, 10%, than they were before Why? >due to them being their own category and the large finance companies dominating the finance category before the split. Who decides that now the weight is larger? (Hint: does the expression "market-cap weighted" ring a bell?)
    - tcoppi 10y ago
      There's also the effect where, say, an S&P 500 Index Fund is replicating the index not by purely buying each individual component but by replicating the return of the constituent sectors of the index. In this way, it is possible(likely maybe even, since traditional finance companies have such a high market cap) that an index fund could have been tracking the index by buying major constituents like banks and completely neglecting REITs, and been ok. Now that they are in a separate sector that is not possible to do, even considering market-cap weighting, so some money will necessarily be re-balanced into the REITs and away from other sectors.
      - loeg 10y ago
        That's not how it works. If they were too small to be sampled before, they're still too small. Just because they have a seperate sector now doesn't mean a market-cap total index (or even S&P500) has to buy more of them than before to track the index with minimal error. (Nevermind that, in all likelihood all big S&P500 index funds already own every single fund in the 500; and usually a few more below the top 500 as well.)
        tcoppi 10y ago
        Depends on the prospectus, most I've looked at that do this sort of thing says they will hold something in every sector to match the returns, but are nonspecific as to the exact composition of how much they aim to hold of each sector to match the overall returns(talking about total-market/return funds btw, S&P 500 was a bad example since a lot of REITs are not in the 500 anyway).
        loeg 10y ago
        The big total market funds almost assuredly already owned at least one REIT that would land in the new sector :-).

kgwgk 10y ago

The 10% attributed to REITs is coming directly from the 60% in Finance. Because it was actually composed of 50% Finance/NonREITs + 10% Finance/REITs.

chollida1 10y ago
> The 10% attributed to REITs is coming directly from the 60% in Finance. Yes, that is correct but I think I'm still failing to help you understand. Previous to the re-balance the 60% of finance is dominated by old fiance companies at the expense of REITS such that REITS only make up say 3% of the entire ETF. After the re-balance REIT's are now a much larger portion of the ETF, 10%, than they were before due to them being their own category and the large fiance companies dominating the fiance category before the split. The reason why REITS are now bigger is the same as the reason for giving them their own category. Propulsive they were underrepresented due to being lumped in with fiance. Now that they have their own category there is more demand for them, hence they now have a larger percentage of the ETF. Does this help you understand?
- kgwgk 10y ago
  >Previous to the re-balance the 60% of finance is dominated by old finance companies at the expense of REITS such that REITS only make up say 3% of the entire ETF No, they make 10% of the entire ETF. Otherwise your example doesn't make sense. >After the re-balance REIT's are now a much larger portion of the ETF, 10%, than they were before Why? >due to them being their own category and the large finance companies dominating the finance category before the split. Who decides that now the weight is larger? (Hint: does the expression "market-cap weighted" ring a bell?)
  - tcoppi 10y ago
    There's also the effect where, say, an S&P 500 Index Fund is replicating the index not by purely buying each individual component but by replicating the return of the constituent sectors of the index. In this way, it is possible(likely maybe even, since traditional finance companies have such a high market cap) that an index fund could have been tracking the index by buying major constituents like banks and completely neglecting REITs, and been ok. Now that they are in a separate sector that is not possible to do, even considering market-cap weighting, so some money will necessarily be re-balanced into the REITs and away from other sectors.
    - loeg 10y ago
      That's not how it works. If they were too small to be sampled before, they're still too small. Just because they have a seperate sector now doesn't mean a market-cap total index (or even S&P500) has to buy more of them than before to track the index with minimal error. (Nevermind that, in all likelihood all big S&P500 index funds already own every single fund in the 500; and usually a few more below the top 500 as well.)
      - tcoppi 10y ago
        Depends on the prospectus, most I've looked at that do this sort of thing says they will hold something in every sector to match the returns, but are nonspecific as to the exact composition of how much they aim to hold of each sector to match the overall returns(talking about total-market/return funds btw, S&P 500 was a bad example since a lot of REITs are not in the 500 anyway).
        loeg 10y ago
        The big total market funds almost assuredly already owned at least one REIT that would land in the new sector :-).