The result will be a more balanced index, but also some difficult questions about just how passive “passive investing” really is. The biggest fund tracking the Nasdaq 100, Invesco’s “qqq Trust”, invests more than $200bn (roughly the value of Netflix, the index’s 14th-largest firm). Following the rebalancing, it will need to quickly sell large volumes of shares in its biggest holdings and buy more in its smaller ones. It is hard to argue that such a move simply tracks the market rather than—at the margins, at least—influencing it.
The need for rebalancing also highlights a criticism of index investing: that it is really a form of momentum play. Putting money into a fund that allocates it according to firms’ market value necessarily means buying more of the shares that have done well. Conversely, keeping money in such a fund means not taking profits from the outperformers, but continuing to hold them as they grow bigger. Even if chasing winners is often a lucrative strategy, it is not an entirely passive one.
Meanwhile, as America’s stockmarket grows ever more concentrated, some spy an opportunity. On July 13th Invesco announced an “equal-weight” nasdaq 100 fund, investing 1% of its assets in each of the index’s constituents. This sort of strategy will mainly appeal to private investors, who, unlike professional fund managers, can afford to be “index agnostic”, says Chris Mellor, one of those overseeing the launch. This year, the outperformance of the biggest companies would have left investors lagging behind. But trends like this periodically reverse—as in 2022, when the giants plunged (see chart). Mr Mellor guesses that the new fund could garner perhaps a tenth of the assets of its mainstream counterpart. Its administrators, at least, will still be making hay. ■
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