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That's a two edged sword. Yes, the passive funds initially all must buy up shares to even out their holdings. But they also must sell off shares if Tesla stock
by jjeaff 5y ago
That's a two edged sword. Yes, the passive funds initially all must buy up shares to even out their holdings. But they also must sell off shares if Tesla stock underperforms other members of the sp500 in order to balance out their holdings.
- javagram 5y agoThat’s not how the vast majority of index funds work. Most s&p 500 index funds are market cap weight, not equal weight. A fund weighted by market cap only needs to sell shares when/if shareholders decide to cash out of the entire fund.
- jjeaff 5y agoThat's not correct. If you are market cap weighted and Tesla prices crash, that lowers the market cap of Tesla thus making it a smaller percentage of the total market cap of the index. Or, if some of the other companies were to take off and increase their market cap, same thing, the fund will need to sell Tesla shares to redistribute the fund by market cap.