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> But, the index funds are free riding on the decisions taken by active investors. I'm sure there is a pretty clear criteria for making it to the S&P 500 or th

> But, the index funds are free riding on the decisions taken by active investors. I'm sure there is a pretty clear criteria for making it to the S&P 500 or the Nasdaq 100. Which means it can be coded up. Index funds don't track the investments of other active investors. They track the performance of companies (typically market leaders) based on some transparent and objective criteria. These performances could be tied to a multitude of factors - Founder managed, innovative, market focus, sales & marketing, slave labor, good copycats who knows (or cares?). The point is they've made it to the top of some list and are generating revenue within a system of "acceptable" checks and balances. If the company doesn't meet that criteria, it will be booted off of that list. The bet is always focused on objective criteria. None of that is free riding on active traders.

graeme 7y ago
This is not correct. According to wikipedia, the s and p (for example) has eight criteria: market capitalization, liquidity, domicile, public float, sector classification, financial viability, and length of time publicly traded and stock exchange. Market cap and liquidity are determined entirely by active traders. Domicile, public float and sector classification are more negative criteria than positives. They exclude a company from the index for not meeting them, but by themselves are not reason for inclusion. Many american companies meet them. The same applies to length of time traded. That leaves only one criterion, financial viability. Meanwhile, the purpose of the index is to track the performance of the 500 largest companies. That's market cap, determined entirely by the price of shares outstanding multiplied by their number.
- sriram_sun 7y ago
  Ok. Thanks I see your point. Active traders set current market value. So if the price of AAPL goes to $1MM, then the indexes adjust accordingly. Cool!

graeme 7y ago

This is not correct. According to wikipedia, the s and p (for example) has eight criteria: market capitalization, liquidity, domicile, public float, sector classification, financial viability, and length of time publicly traded and stock exchange. Market cap and liquidity are determined entirely by active traders. Domicile, public float and sector classification are more negative criteria than positives. They exclude a company from the index for not meeting them, but by themselves are not reason for inclusion. Many american companies meet them. The same applies to length of time traded. That leaves only one criterion, financial viability. Meanwhile, the purpose of the index is to track the performance of the 500 largest companies. That's market cap, determined entirely by the price of shares outstanding multiplied by their number.

sriram_sun 7y ago
Ok. Thanks I see your point. Active traders set current market value. So if the price of AAPL goes to $1MM, then the indexes adjust accordingly. Cool!