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The index fund's counterparty, which is selling the stocks is divesting 90% from X, and 10% from Y, though. There's always a counterparty to a trade.
by vkou 9mo ago
The index fund's counterparty, which is selling the stocks is divesting 90% from X, and 10% from Y, though. There's always a counterparty to a trade.
- ethbr1 9mo agoObviously, but the point here is that cap-weighted index funds convert new money into buyers-at-any-price of their components. When they're more concentrated in specific holdings, and have enough new money, wouldn't that artificially support higher prices for those holdings (above what the market would otherwise bear)?
- vkou 9mo agoWhy not flip the argument, and say that the index fund is propping up stock B because of it's buy-at-any-price nature? What makes you think that valuing it at 10% of A isn't higher than what the market will actually bear? The sensible and consistent way to this is that... Index funds don't really have any effect on relative stock prices. If stock A is overvalued or undervalued, it's due to active investors being morons.