BHP leaving FTSE - impact on trackers?

DoctorStrange

I've read that BHP is going to leave the FTSE.

As one of (the?) biggest companies in the FTSE100, what impact will this have on trackers on "change day"?

I understand that going forward we'd lose future performance, but if the total index on "CD-1" is calculated on the market cap of all the companies, and the replacement by definition will be a much smaller company, then the total market cap will be a lot lower on CD, so does that translate into a lower index level and thus trackers are expected to fall?

And will ETFs fare differently? Like if they sell their BHP shares then rebalance to the new, lower level, will there be cash left over?

I'd love to hear any thoughts on any possible negative impact

MX5huggy

The trackers will have to sell the BHP shares use a small percentage of that to buy the company coming in and then but in proportion a bit of all the companies left. 

wmb194

DoctorStrange said:

I've read that BHP is going to leave the FTSE.

As one of (the?) biggest companies in the FTSE100, what impact will this have on trackers on "change day"?

I understand that going forward we'd lose future performance, but if the total index on "CD-1" is calculated on the market cap of all the companies, and the replacement by definition will be a much smaller company, then the total market cap will be a lot lower on CD, so does that translate into a lower index level and thus trackers are expected to fall?

And will ETFs fare differently? Like if they sell their BHP shares then rebalance to the new, lower level, will there be cash left over?

I'd love to hear any thoughts on any possible negative impact

There's a recent FT article on this. All things equal it will be replaced on 31/01/22 by Carnival, market cap £2.7bn vs £53bn, according to the LSE's website. It doesn't attempt to crunch any numbers for the FTSE but I've found an out of date article from August which tries,

"At present, BHP makes up more than 2.5% of the FTSE 100, 2% of the FTSE All-Share index, 1.3% of the Euro Stoxx 50 and more than 0.6% of the MSCI Europe .. making Sydney its primary base will have a much more pronounced impact on Pacific exposures, with the S&P ASX 200, MSCI Pacific ex-Japan and FTSE Asia Pacific indices expected to increase their allocation to the stock from 7.2%, 5.6% and 1.4%, to 11.7%, 9.2% and 2.4%, respectively.

https://www.ft.com/content/d75f0bec-3694-44ed-babd-3facfe420418

https://www.etfstream.com/features/should-etf-investors-consider-impact-of-potential-bhp-deletion-from-major-indices/

Thrugelmir

DoctorStrange said:

As one of (the?) biggest companies in the FTSE100, what impact will this have on trackers on "change day"?

Depends on which index the tracker is benchmarked against. Pure FTSE100 trackers have never gained any traction. 

DoctorStrange

Seems to me that the Index level will fall purely as a result of this reshuffle, as the total market cap will be lower.

Like if the company lost all it's value the index would fall say 2.5% (all else being equal of course). The same result should occur when BHP is removed.

So if one held a FTSE 100 ETF or Unit Trust, the NAV should be unaffected as they'd sell at market value, but the index value is now zero so the ETF will gain an artificial performance boost of 2.5% against the index. 

Synthetic ETFs though might not hold the shares to sell, though, and so might track the actual index level and so investors in those products might lose 2.5% compared to the other variants. 

Just trying to understand the mechanics of it all

masonic

The index won't fall, it's market cap will. The other companies in the index will increase in weighting to compensate. The index tracks share price performance, changes to the index consitituents are neutral events. The value of the index will be calculated on the same basis as funds that will have proceeds from disposal of the outgoing company. If this were not the case, every change to the index would introduce tracking error as the tracker funds make returns from the disposal while the index did not.

The UK market will be a slightly smaller proportion of global indexes, but that will be hardly noticeable, it's down at around 5% already, so the difference will be about 0.1%.

Makes the UK market a bit more investable, as it will be down one 'old-world' company

DoctorStrange

The index level is based on the total market cap though, right?

I don't understand the full calculation but don't they add up the total market caps and use that as a factor/divisor in the index calculation. In that case, then the index must change as well?

masonic

DoctorStrange said:

The index level is based on the total market cap though, right?

No, it is an arbitrary number that tracks market movements, fixed at a specific value some time in the past, like the value of units in a fund, or the price of a share in a company. For example, the FTSE 100 began on 3rd Jan 1984 and was assigned the value of 1000.

DoctorStrange said:

I don't understand the full calculation but don't they add up the total market caps and use that as a factor/divisor in the index calculation. In that case, then the index must change as well?

Explained here: https://research.ftserussell.com/products/downloads/FTSE_UK_Index_Series_Guide_to_Calc.pdf

"The divisor is subsequently adjusted for any capital changes in the index constituents. In order to prevent discontinuities in the index in the event of a corporate action or change in constituents it is necessary to make an adjustment to the prices used to calculate the index to ensure that the change in index between two consecutive dates reflects only market movements rather than including change due to the impact of corporate actions or constituent changes."