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The dig at "Active Management" feels like it detracts from the article, but I guess they're playing a bit to the audience. What I found a little more concernin
by derivagral 7y ago
The dig at "Active Management" feels like it detracts from the article, but I guess they're playing a bit to the audience.
What I found a little more concerning is their glossing over of the liquidity risks. If everyone wants to sell an index, then at some point that index needs to liquidate shares (proportionally). Those shares won't have uniform demand, which is going to cause both price fluctuations (drops) which affect the value of the index. The fun part here too is that this can play some havoc with market-cap weighted indexes, which now need to adjust their holding %'s.
- wbl 7y agoNo they don't. Let's suppose we have A Corp and B Corp both 50٪ of the total market and A Corps price and hence market cap falls by 50٪, making it 33٪ of the total market. The holdings of a fund haven't changed but the exposure still equals the market.
- gzu 7y agoHe is saying when people exit and index sells all their stocks equal to current market cap rankings that the opposite side of trade buy demand for all those won’t be equal. Bad stocks may go down further than solid companies. A shift in value vs growth preferences caused by the downturn itself could be the cause of that. The entire index and all holdings would then HAVE to readjust for this discrepancy and lead to more forced selling of bad stocks and buying of solid companies creating more liquidity crisis.