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  • FIRST POST
    • NewInvestor1
    • By NewInvestor1 13th Jul 18, 12:52 PM
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    NewInvestor1
    In a Ftse Tracker, what would happen if a stock was relegated?
    • #1
    • 13th Jul 18, 12:52 PM
    In a Ftse Tracker, what would happen if a stock was relegated? 13th Jul 18 at 12:52 PM
    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?
Page 1
    • Economic
    • By Economic 13th Jul 18, 1:03 PM
    • 364 Posts
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    Economic
    • #2
    • 13th Jul 18, 1:03 PM
    • #2
    • 13th Jul 18, 1:03 PM
    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.
    • Tom99
    • By Tom99 14th Jul 18, 2:13 AM
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    Tom99
    • #3
    • 14th Jul 18, 2:13 AM
    • #3
    • 14th Jul 18, 2:13 AM
    And of course if the fund also has a FTSE250 tracker they will probably not need to sell/buy at all.
    • AnotherJoe
    • By AnotherJoe 14th Jul 18, 8:51 AM
    • 11,495 Posts
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    AnotherJoe
    • #4
    • 14th Jul 18, 8:51 AM
    • #4
    • 14th Jul 18, 8:51 AM
    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?
    Originally posted by NewInvestor1
    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.
    • NewInvestor1
    • By NewInvestor1 14th Jul 18, 11:09 AM
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    NewInvestor1
    • #5
    • 14th Jul 18, 11:09 AM
    • #5
    • 14th Jul 18, 11:09 AM
    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?
    • Thrugelmir
    • By Thrugelmir 14th Jul 18, 11:24 AM
    • 61,061 Posts
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    Thrugelmir
    • #6
    • 14th Jul 18, 11:24 AM
    • #6
    • 14th Jul 18, 11:24 AM
    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.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • AnotherJoe
    • By AnotherJoe 14th Jul 18, 12:11 PM
    • 11,495 Posts
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    AnotherJoe
    • #7
    • 14th Jul 18, 12:11 PM
    • #7
    • 14th Jul 18, 12:11 PM
    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?
    Originally posted by NewInvestor1

    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.
    Last edited by AnotherJoe; 14-07-2018 at 12:19 PM.
    • Tom99
    • By Tom99 14th Jul 18, 1:45 PM
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    Tom99
    • #8
    • 14th Jul 18, 1:45 PM
    • #8
    • 14th Jul 18, 1:45 PM
    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.
    Originally posted by Thrugelmir

    Trackers don't need to buy more stock when prices increase nor sell when prices decline.
    • grey gym sock
    • By grey gym sock 15th Jul 18, 3:37 AM
    • 4,444 Posts
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    grey gym sock
    • #9
    • 15th Jul 18, 3:37 AM
    • #9
    • 15th Jul 18, 3:37 AM
    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.
    Last edited by grey gym sock; 15-07-2018 at 3:41 AM.
    • bowlhead99
    • By bowlhead99 15th Jul 18, 11:32 AM
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    bowlhead99
    Trackers don't need to buy more stock when prices increase nor sell when prices decline.
    Originally posted by Tom99
    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.
    • Tom99
    • By Tom99 15th Jul 18, 12:22 PM
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    Tom99
    Trackers don't need to buy more stock when prices increase nor sell when prices decline.
    Originally posted by Tom99

    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.
    Originally posted by bowlhead99

    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.
    Last edited by Tom99; 15-07-2018 at 12:24 PM.
    • bowlhead99
    • By bowlhead99 15th Jul 18, 12:34 PM
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    bowlhead99

    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.
    Originally posted by Tom99
    They are not buying more shares of the company because it has gone up in value, but they are buying more shares of the company because they have new money to spend (provided by their investors) and they are putting relatively more of the money into the ones where the price has gone up and relatively less into the ones where the price has gone down.

    So, they are not forced to buy more shares in the expensive companies just because those companies' prices rose; but simply, because those companies' prices rose and they have money to spend.

    As Thrug says, if there are few sellers for a particular stock, its price will rise. Resulting in trackers having to buy more of it (assuming trackers have money to spend, which they often do).
    • MoneyGeoff
    • By MoneyGeoff 15th Jul 18, 12:45 PM
    • 148 Posts
    • 110 Thanks
    MoneyGeoff
    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?
    Originally posted by NewInvestor1
    Tracker funds don't just invest in FTSE and FTSE doesn't just mean FTSE100.

    FTSE100 is a terrible index to track. There are global trackers and many other trackers that have a very small percentage in FTSE100 companies.
    • Tom99
    • By Tom99 15th Jul 18, 1:01 PM
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    Tom99
    As Thrug says, if there are few sellers for a particular stock, its price will rise. Resulting in trackers having to buy more of it (assuming trackers have money to spend, which they often do).
    Originally posted by bowlhead99

    If the tracker has money to spend they will have to buy more stock whether the price has gone up or down. The price of the stock going up does not cause the tracker to buy more of it.
    • bowlhead99
    • By bowlhead99 15th Jul 18, 9:48 PM
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    bowlhead99
    If the tracker has money to spend they will have to buy more stock whether the price has gone up or down. The price of the stock going up does not cause the tracker to buy more of it.
    Originally posted by Tom99
    It causes them to allocate more of their new capital to that stock rather than to other stocks, assuming it has gone up relatively more than other stocks, and assuming, as you say, that the tracker has money to spend and will have to buy more stock (whether the price has gone up or down).

    So... trackers with money to spend will have to buy more total stock across their portfolio to minimise their cash holdings, whether the price has gone up or down. And if it has gone up, relative to other things, they will allocate more pounds to it than if it had gone down relative to other things.
    • Tom99
    • By Tom99 16th Jul 18, 4:05 AM
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    Tom99
    It causes them to allocate more of their new capital to that stock rather than to other stocks, assuming it has gone up relatively more than other stocks, and assuming, as you say, that the tracker has money to spend and will have to buy more stock (whether the price has gone up or down).

    So... trackers with money to spend will have to buy more total stock across their portfolio to minimise their cash holdings, whether the price has gone up or down. And if it has gone up, relative to other things, they will allocate more pounds to it than if it had gone down relative to other things.
    Originally posted by bowlhead99

    So just to summarise, a tracker does not buy more of a stock just because of a price increases, which is the point I was originally making. It will only buy more stock when they have new money to spend.
    The amount of that new money allocated to a particular stock will depend entirely on its relativity to other stocks in the index not on whether the price of that stock has gone up or down.
    • nrsql
    • By nrsql 16th Jul 18, 7:57 AM
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    nrsql
    If it's a ftse 100 tracker then it depends on the tracker conditions. It will have to align with the index at some point but can be ahead or behind. May use derivatives.
    Usually doesn't have to buy/sell an the day the index is changed .
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