ETFs are great investments. They are low-cost and easy to understand. Yet, they are not without their drawbacks. One well-known drawback is that hedge funds replicate indices and this means that if the index changes and drops a company from its membership while admitting another, ETFs become forced sellers of the dropped stocks and forced buyers of the newly included stocks. This gives hedge funds an opportunity to front-run the ETF trades.
Could it simply be that hedge funds have alpha, so the stocks they buy tend to rise in price and that makes them more likely to meet index criteria? It’s not necessarily an explicit index arbitrage trade.
Very interesting and for me personal. (Is this about me buying AXON at 220 a share!)
Thank you. :)
Curious why only ETFs? Wouldn't this impact mutual funds as well or is this like the financial media moving away from the DJIA? :)
Could it simply be that hedge funds have alpha, so the stocks they buy tend to rise in price and that makes them more likely to meet index criteria? It’s not necessarily an explicit index arbitrage trade.