In a Ftse Tracker, what would happen if a stock was relegated?
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NewInvestor1
Posts: 5 Forumite
Hi everyone, new to investing.
For example if Tesco was relegated and replaced with Dominos pizza.
Would this cause a mass sell of Tesco in the fund, and a massive buy of Dominos pizza? Which would result in a low selling price for Tesco and high for Dominos pizza, meaning it could be costly?
For example if Tesco was relegated and replaced with Dominos pizza.
Would this cause a mass sell of Tesco in the fund, and a massive buy of Dominos pizza? Which would result in a low selling price for Tesco and high for Dominos pizza, meaning it could be costly?
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Comments
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The smallest companies in the FTSE100 are valued at £4.6 billion whereas the total market value of the FTSE100 is £2.1 trillion so one of the smallest companies accounts for 0.2% of the index. Even a significant change in its share price will have little effect on the total market value of the FTSE100.0
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[FONT=Verdana, sans-serif]And of course if the fund also has a FTSE250 tracker they will probably not need to sell/buy at all.[/FONT]0
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NewInvestor1 wrote: »Hi everyone, new to investing.
For example if Tesco was relegated and replaced with Dominos pizza.
Would this cause a mass sell of Tesco in the fund, and a massive buy of Dominos pizza? Which would result in a low selling price for Tesco and high for Dominos pizza, meaning it could be costly?
This is all part of what normally happens, each quarter companies leave and enter the index. It's a normal part of the costs and a reason why an index fund will always lag the actual index return since the index return doesn't include the costs. I don't know if was in, but when Carillion went bust look at what happened then, big loss of value plus more purchases needed for whatever came in.
As said though the main issue is that the companies near the bottom, where the bottom is anything below the top 20 have a nominal influence on the index, so the 100th company is trivial.0 -
Thanks guys,
With the rise of tracker funds, how can everyone keep buying and buying ftse 100 stocks? What if no one holding those shares want to sell?0 -
There's always sellers. The fewer there are the higher the price gets driven. Which results in trackers needing to buy more. While offloading other stocks. Judgement day arrives when a stock underperforms. If trackers dominate the market. Where are the buyers. Stock prices could become far more volatile.0
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NewInvestor1 wrote: »Thanks guys,
With the rise of tracker funds, how can everyone keep buying and buying ftse 100 stocks? What if no one holding those shares want to sell?
Then the price rises until some do and there's a match between buyers and sellers.
That's how the market works !
Now, I suppose you may be asking, what if all (say) BP shares were held by Index funds how could a new fund buy them ? Well, first of all, that is nowhere near the case. According to Google, 17.5% are. (for all funds averaged. I dont know what BP % is). So, a long way to go.
Next, I suppose what would happen is that the price of BP would start to rise and BP might offer a share tender, for which other funds would buy, and then as said the price woudl rise even more. And at some point it will become so disconnected from reality it will drop and a vicious spiral will ensue.So as said by another poster, possibly more volatile prices shoudl you get to very high% of shares being held by indexes.0 -
Thrugelmir wrote: »There's always sellers. The fewer there are the higher the price gets driven. Which results in trackers needing to buy more. While offloading other stocks. Judgement day arrives when a stock underperforms. If trackers dominate the market. Where are the buyers. Stock prices could become far more volatile.
[FONT=Verdana, sans-serif]Trackers don't need to buy more stock when prices increase nor sell when prices decline.[/FONT]0 -
there probably is an effect that shares kicked out of an index tend to fall excessively far in anticipation of that happening; and shares being added to an index to rise excessively far in anticipation. which reduces the returns from tracking an index from what they "might" be (though note that this is not mainly about tracking error: the index itself suffers from this effect, because it swaps out the old share for the new at the possibly unfavourable prices; in addition to that, there could be tracking error from trading costs).
and it is a small effect, when you consider that each of the smallest companies in the FTSE 100 is only worth about 0.2% of the index.
however, this is a possible reason to use a FTSE all share tracker instead of a FTSE 100 tracker. because with the former, the companies entering and leaving the index are only worth about £100m or £200m, which is no more than 0.01% of the value of the whole index. so the effect is even smaller.
in general, this is a reason to favour broader indexes, which include not just big capitalization shares, but also mid-cap, and even small-cap.0 -
The biggest index funds are open-ended rather than closed. When the next person comes along to put £100 into their fund, most of the £100 goes into the biggest companies. If the price of a company has risen compared to what it was last time the trackers were in the market to buy shares, the trackers have to buy relatively more of it, with every pound of new capital that they have to deploy. They don't get a choice in the matter - they must favour the biggest things to the detriment of the smaller things.[FONT=Verdana, sans-serif]Trackers don't need to buy more stock when prices increase nor sell when prices decline.[/FONT]
Similarly when investors decide that the indexes look a little high (or whatever reason they have for redeploying their capital to an asset allocation with lower amounts in the particular equity index being discussed) and they want to take £100 or £100k or £100m out of the index fund - the fund has to indiscriminately (by the workings of its model formula) dump the biggest of its holdings to get the £100m of proceeds (or whatever amount of cash is needed to satisfy redemptions) and most of the £100m will be taken from the largest holdings with not very much (in pound terms) being sold off the smaller holdings.0 -
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]Trackers don't need to buy more stock when prices increase nor sell when prices decline.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT]bowlhead99 wrote: »The biggest index funds are open-ended rather than closed. When the next person comes along to put £100 into their fund, most of the £100 goes into the biggest companies. If the price of a company has risen compared to what it was last time the trackers were in the market to buy shares, the trackers have to buy relatively more of it, with every pound of new capital that they have to deploy. They don't get a choice in the matter - they must favour the biggest things to the detriment of the smaller things.
Similarly when investors decide that the indexes look a little high (or whatever reason they have for redeploying their capital to an asset allocation with lower amounts in the particular equity index being discussed) and they want to take £100 or £100k or £100m out of the index fund - the fund has to indiscriminately (by the workings of its model formula) dump the biggest of its holdings to get the £100m of proceeds (or whatever amount of cash is needed to satisfy redemptions) and most of the £100m will be taken from the largest holdings with not very much (in pound terms) being sold off the smaller holdings.
[FONT=Verdana, sans-serif]They are therefore buying/selling shares because money is flowing into or out of the fund not because the price of the share has gone up or down.[/FONT]0
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