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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
by 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 agoThat'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 agoDepends 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 agoThe big total market funds almost assuredly already owned at least one REIT that would land in the new sector :-).