Two weeks ago, I wrote a post on research that showed that cash flows into index funds distort the relative momentum between stocks that are included in the index and those that are not as well as between larger and smaller stocks in that index. In reaction to that post, I received two kinds of responses. First, a large number of readers wrote me that my claim that nobody had ever heard of that argument before was wrong and that there are plenty of people who had been making this argument before. So, I stand corrected in my ignorance. I just hadn’t caught up on that discussion or that argument.
Really interesting article - as per usual Joachim, but it did lead me to think if spreads are different between index and non-index constituents. The round-trip cost might be cheaper to trade stocks that are in the index and volumes could have an impact from a liquidity and portfolio management perspective. This could then have knock-on impacts from the investment risk departments with regard to tracking error, tracking tolerances and the like. Also, I wonder if any work has been done relating to the derivatives side of things and the counterparty risks associated.
Really interesting article - as per usual Joachim, but it did lead me to think if spreads are different between index and non-index constituents. The round-trip cost might be cheaper to trade stocks that are in the index and volumes could have an impact from a liquidity and portfolio management perspective. This could then have knock-on impacts from the investment risk departments with regard to tracking error, tracking tolerances and the like. Also, I wonder if any work has been done relating to the derivatives side of things and the counterparty risks associated.