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Something I've wondered is how index funds effect companies entering the index for the first time. Like, let's say there's a company (TryerCo) that is the 501s
by dukeyukey 2y ago
Something I've wondered is how index funds effect companies entering the index for the first time.
Like, let's say there's a company (TryerCo) that is the 501st biggest in the US. Big, but still one step away from being in the S&P 500.
Then, one of the S&P 500s collapse. They exit the index, and TryerCo enters the index at position 500, despite no material change since the day before.
Doesn't this mean a whole _heap_ of index funds will suddenly start buying TryerCo stock, sending it up thanks to the arbitrary number 500?
- gizajob 2y agoThe ETFs are generally rebalanced once a quarter, so yeah, it really is a big deal when a company enters one of the main indices, and the price starts to move up in anticipation of the listing, then stays up because the ETFs, as you intuit, have to start buying it as a component of the market. Supermicro entering S&P500 and Arm entering Nasdaq 100 being good examples recently.
- Marsymars 2y agoThis is basically priced in based on the odds of entering an index in the same way that potential acquisitions get priced in based on the odds of the acquisition going through. I swear I've seen actively managed funds that explicitly trade based on stocks' potential to enter/leave indexes, but it's a terrible batch of terms to try to google.
- throwaway2037 2y agoYou can search for research that studies this exact index effect. Short term: yes, but it wears off quickly.