Dow dumps GM and Citi. Cisco and Travelers Insurance are in.

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Sunny Sarkar
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Dow dumps GM and Citi. Cisco and Travelers Insurance are in.

Post by Sunny Sarkar »

Not that we didn't see that coming.

Dow ETFs forced to sell low and buy high.
Compounding
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GM in Indexes

Post by Compounding »

This makes me wonder about the large cap index funds that track the Dow, S&P500, Russell 1000, etc: Did these indexes hold onto GM for the whole ride down? Are these funds just now selling upon its official bankruptcy? Wouldn't you think the Dow or S&P would've kicked GM out long ago based on their own internal criteria?

Perhaps a small chink in the armor for indexing - its a long ride down before a large company like GM, Enron, WorldCom is kicked out. Not sure how much of a drag that one collapsing stock would have on returns, as the index would be forced to sell more and more as the stocks market caps gets smaller.

Am I missing something on this?
bombcar
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Post by bombcar »

Nope. In theory, you could slightly beat the index funds (but probably not the index) by front-running it in cases like this.

In reality, it turns out not to be much of an issue, especially in the market weighted indexes.

And it's happened before, too.
savermike
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Post by savermike »

It has been posted on this forum before that Vanguard's Gus Sauter has estimated that the S&P 500 index fund loses 0.25% per year to front-running. You can call that small if you want, but it's greater than the fund's expense ratio.
Perhaps a small chink in the armor for indexing - its a long ride down before a large company like GM, Enron, WorldCom is kicked out. Not sure how much of a drag that one collapsing stock would have on returns, as the index would be forced to sell more and more as the stocks market caps gets smaller.
A fund tracking a capitalization-weighted index like the S&P 500 does not have to trade as stock prices fall (or rise). That's the beauty of cap weighting, and the reason why funds tracking such indexes--especially "we'll take everything, please" indexes like the DJ-Wilshire 5000--can be very tax efficient.

If the bottom falls out of a stock such that it no longer belongs in a given index, how and when the stock is kicked out of the index is a matter of each index's policy. Some indexes are easier to front-run than others. The Russell 2000 has a reputation for being easy to front-run, being easier to determine how and when it will change.

Mike
savermike
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Post by savermike »

Oh, and please, mommas, don't let your babies grow up to buy anything that tracks the DJIA.

Mike
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simplesimon
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Post by simplesimon »

Compounding wrote:Perhaps a small chink in the armor for indexing - its a long ride down before a large company like GM, Enron, WorldCom is kicked out. Not sure how much of a drag that one collapsing stock would have on returns, as the index would be forced to sell more and more as the stocks market caps gets smaller.
The index wouldn't have to sell if the market cap gets smaller...the smaller price already makes market cap smaller.

Edit: Oh I see that savermike has already mentioned this. :D
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stratton
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Post by stratton »

BRKA intead of Travellers. :lol:

That will give the DJIA an immediate kick!

Paul
heyyou
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Post by heyyou »

A few years ago, the Russell Indexes changed their procedures to make it more difficult to front run their index changes.
EyeDee
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Wait?

Post by EyeDee »

.
Since GM went into bankruptcy and has been delisted from the NYSE and now trades over the counter, why are they waiting until June 8 to do the actually replacement of GM with CISCO in the Dow?

Thank you.
Randy | SCA - Build Savings early by living below one's means, minimize Costs including taxes, and maintain a diverse Allocation.
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