Passive Funds Face an Active Nightmare 💀

Passive Funds Face an Active Nightmare 

There are hundreds of stock market constituents working overtime to limit lockdown damage; it’s inevitable that some will lose the pack. It’s also very competitive to list on America’s most esteemed exchanges, so stock market status is at risk for some.

There are rules-based requirements a company must meet to be in contention for listing. The S&P 500 demands liquidity, profitability, and a minimum market capitalization of 8.2-billion-dollars. It’s up to index compilers to reshuffle members periodically, and index fund managers to buy and sell the arriving and departing companies, respectively.

Index funds hold every stock on a stock exchange. It’s money for old rope to manage one; they require no active management, or so we thought. It seems more stocks will need reshuffling than has been the annual average for over thirty years, and passive funds are so popular now that huge block trades will be required to make the changes.

The funds cost a pittance because they normally require no superstar stock picker, but now the transaction costs for moving this much money are insane. It won’t be feasible to sell all the demotees and buy all the promotees, especially considering the coronavirus impact may be temporary. There could be delisted companies that need bringing back!

This has forced index managers into judgment calls; “will this company be permanently affected by coronavirus relative to other companies? Should we ditch it now, or wait?”

It’s contentious because passive investors specifically don’t want their money managed according these kinds of decisions, speculative predictions of the future. These funds aren’t doing their job if they don’t track their index properly, though, and could see withdrawals. They also represent a key macroeconomic signal. Something’s got to give!

Share:
More Posts
Get your daily Invstr Crunch

Get the market news and updates you need, delivered to your inbox or available on our daily podcast.

Risk Disclosure:

Invstr is not a bank and banking services are provided by Vast Bank, N.A.

Brokerage and Banking services are currently only available to U.S. residents.

Invstr app and web services are provided by Invstr Ltd. Advisory services are provided by Invstr Financial LLC, an investment adviser registered with the Securities Exchange Commission (SEC) details of which can be obtained here. Securities brokerage and custody services are provided by Apex Clearing, a broker dealer registered with the SEC and a member of FINRA and SIPC. There is no bank guarantee on securities and securities may lose value.

Investing involves risk and can lead to losses. Past performance does not guarantee future results.

Invstr app and web services are provided by Invstr Ltd. Invstr+ advisory services are provided by Invstr Financial LLC, an investment adviser registered with the Securities Exchange Commission (SEC). Securities brokerage and custody services are provided by Apex Clearing, a broker dealer registered with the SEC and a member of FINRA and SIPC. There is no bank guarantee on securities and securities may lose value. Vast Bank N.A. a nationally chartered bank and member of the FDIC, provides the banking products, including the products and services related to digital asset accounts. As with any asset, the value of Digital assets can go up or down and there can be a substantial risk that you lose money buying or holding digital assets. You should carefully consider whether trading or holding Digital assets is suitable for you in light of your financial condition. Your digital account does not support wallet to wallet transferring of your digital assets (i.e. cryptocurrencies) outside the platform. Any Digital Assets in your digital asset account are not insured by any government entities, including but not limited to FDIC or SIPC. The Invstr Visa® Debit Card is issued by Vast Bank, N.A. pursuant to a license from Visa U.S.A Inc and may be used everywhere Visa debit cards are accepted. Invstr Ltd, Invstr Financial LLC and Invstr Securities Ltd are subsidiaries of Marketspringpad Holdings (collectively “Invstr”) and Invstr is solely responsible for the application services and website content.

Watchlists provided when users first access the service are not a recommendation to invest. Instead they are provided to help users better navigate the service. Users are free to edit and create their own watchlists. From time to time, Invstr will suggest instruments solely based on an individual’s interest and the interest levels of the Invstr community. The statistical and portfolio builder models generated by Invstr do not reflect actual investment results and are not guarantees of future results. Comments provided by Invstr leaders, influencers or members of the Invstr Community are not recommendations and should not be construed as such. Invstr does not endorse the content or the positions posted by them. Their investment approach, and that of the models provided by Invstr, may be different from yours and may not be appropriate for you.