A group of smart people are profiting handsomely from all of the people who believe in index or passive investing. Let’s thing through this process – if we buy all of the securities in an index then we’re going to all own the same stocks, buying and selling simultaneously when the indexes change. On June 16th, Russell investments will publish the changes to all of the benchmark indexes – the Russell 2000, 3000, etc. By definition this means all firms that provide indexes or their equivalents will soon be buying the new additions to the indices and selling the deleted securities. Although the announcement comes out on June 16th, the actual trades wont happen to the indexes until June 30th. The smart traders are going to act ahead of this information by buying the newly added stocks prior to all of the indexes buying and selling the deleted stocks prior to the indexes doing the same. Everyone investing in indexes will by definition feel the pain- all buys between June 16th and June 30th will see a substantial price appreciation when the indexes begin to buy heavily and create a big demand, driving prices up. Similarly on the sell side, traders profit by selling ahead of the mass sell off of index securities on the 30th. Which side of this equation are you on?
Index Gangplank Fallout FWUser9978