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The Removal Of PG&E Stock Proves Your Index Fund Isn’t That Passive
FYI: Index funds are supposed to be immune to the hustle and bustle of buying high and selling low that is usually thought of as the typical active managers’ missteps. That’s not quite true, though.
Case in point: S&P Dow Jones Indices booted PG&E (ticker: PCG) stock from a couple of its indexes last week, just days following the California utility’s announcement that it would file for bankruptcy protection at the end of the month caused the stock to sink to $6. However, PG&E stock jumped more than 70% on Jan. 24, when the utility was found not liable for the Tubbs fire in October 2017. Regards, Ted https://www.barrons.com/articles/pg-e-stock-proves-your-index-fund-isnt-that-passive-51548680401?refsec=funds
"Case in point" this is not. The S&P indexes, as I've written before, are the exception, not the rule.
I wrote about (and linked to a column about) the S&P Index Committee where at the end of the dot com boom, it made a misplaced bet on "new economy" stocks. Even the S&P Index Committee acknowledges that its so called indexes are actively managed, by entitling a piece "Inside the S&P 500: An Active Committee".
In a traditional sense (and the one used in the S&P writing) an index is supposed to measure the market, i.e. provide "an accurate picture of the stock market". Yet that paper seems to offer as its rationale for making rule-breaking changes that an objective is to stabilize the market. Maybe that's a different objective from beating the market, but it's still an objective different from measuring the market. Either way, these "indexes" are by intent not providing accurate pictures of the stock market.
The argument that the committee acts to stabilize the market is a curious one to make. It undercuts the thesis that we don't have to worry about too many people investing in indexes (yet) because they don't impact price discovery in a significant way.
In the Barron's piece, Rob Arnott says that discretionary changes to indexes typically underperform the market. M*'s Ben Johnson is quoted as saying "This is what you sign[] up for" when you invest in an index. But you don't have to sign up for discretionary changes. You can pick an index that is rule-based.
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I wrote about (and linked to a column about) the S&P Index Committee where at the end of the dot com boom, it made a misplaced bet on "new economy" stocks. Even the S&P Index Committee acknowledges that its so called indexes are actively managed, by entitling a piece "Inside the S&P 500: An Active Committee".
In a traditional sense (and the one used in the S&P writing) an index is supposed to measure the market, i.e. provide "an accurate picture of the stock market". Yet that paper seems to offer as its rationale for making rule-breaking changes that an objective is to stabilize the market. Maybe that's a different objective from beating the market, but it's still an objective different from measuring the market. Either way, these "indexes" are by intent not providing accurate pictures of the stock market.
The argument that the committee acts to stabilize the market is a curious one to make. It undercuts the thesis that we don't have to worry about too many people investing in indexes (yet) because they don't impact price discovery in a significant way.
In the Barron's piece, Rob Arnott says that discretionary changes to indexes typically underperform the market. M*'s Ben Johnson is quoted as saying "This is what you sign[] up for" when you invest in an index. But you don't have to sign up for discretionary changes. You can pick an index that is rule-based.