Global index trackers

SVaz

What happens with the above when there is a massive shift in the balance of performance?
Say the major US markets take a hammering and fall by 50% - what happens to the make up of index trackers?
Do they keep the allocations the same even though the US market may never perform as well again?   

How long would it take them to readjust the portfolio ?  

Or is it simply the case that the US will always be 60%+ of the World’s index regardless of performance. 

I’m just curious to know how it all works. 

El_Torro

If the US market drops by 50% and the rest of the world doesn’t drop at all (unlikely to ever happen but let’s go with it for now) then the amount of shares that the global tracker has in the US will stay the same, so its allocation will drop from about 60% US to about 30% US. 

A global tracker (assuming it does its job correctly) doesn’t choose an arbitrary allocation by market, the market does it. 

I don’t know how often global trackers reallocate, though I imagine it’s pretty frequently. 

SVaz

That makes perfect sense thank you.

Hoenir

SVaz said:

Say the major US markets take a hammering and fall by 50% - what happens to the make up of index trackers?

Nothing as the underlying holdings remain the same. Only the value has changed. 

SVaz

Yes sorry, I meant the percentages within the make up.
Like if FAANG stocks tank,  they will be a lesser percentage inside the US index. 

InvesterJones

SVaz said:

Yes sorry, I meant the percentages within the make up.
Like if FAANG stocks tank,  they will be a lesser percentage inside the US index. 

And the global (market cap weighted) tracker would reflect that instantly - no need to reallocate since it's the valuations that change.

Gary1984

If we're assuming a current US holding of 60% halving in value with the rest of the world staying the same the value of a $100 global tracker share reduces to $70 with the US holding falling from $60 to $30. So the US allocation would become 30/70 = 42% of the total.

MK62

It's more complicated still if the value of USD changes vs other currencies (almost certain if the US equity market plummeted 50% in isolation)

InvesterJones

MK62 said:

It's more complicated still if the value of USD changes vs other currencies (almost certain if the US equity market plummeted 50% in isolation)

Not really - to compare market capitalisations you're already denominating in one currency, so variances in currency strength already correctly reflect variances in market cap.

JohnWinder

Here's a graphic showing changes over 100 years or so. https://www.bogleheads.org/forum/viewtopic.php?t=351353
If you look at Japan in 1990 you can get a sense of why the current enthusiasm for the SP500 on this forum and elsewhere might be a little bit brave.

Hoenir

JohnWinder said:

If you look at Japan in 1990 you can get a sense of why the current enthusiasm for the SP500 on this forum and elsewhere might be a little bit brave.

If the S&P topples. The reasons will be very different as to why. Both however do share the same sense of investor euphoria. The sense of FOMO. As did the Dot Com era and the GFC companies. History never stops repeating itself.