Many investors assume that major stock market indexes are passive or constant. This couldn’t be farther from the truth. Indexes are changed all the time, and especially after big moves. For example recently the Dow Jones Index booted Honeywell and Atria and added Bank of America and Chevron. This week CBS reports that the MSCI Emerging Markets Index is contemplating changes as well.
Why should you care. Two reasons. First indexes are used to record historical performance. Many investors and investment managers benchmark their investments against an index and often claim performance numbers versus the index. How reliable is this methodology if the index is “managed” and is a moving target. The Dow Jones Average or the Standard & Poor’s Indexes are not what they were 10, 20 or 30 years ago.
Secondly changes in indexes can create swings in the underlying stocks as money managers and “Indexers” realign their investments. Given the large and growing popularity of Index Exchange Traded Funds this is no small matter. Heads Up!
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