Actively Managed Indices

Not everybody realizes that the indices that we refer to as “passive” are actively-managed.  Case in point: the S&P 500 index.

Over the last three years, four dozen companies were removed and replaced in the index, and this made a difference in its performance.  An equal-weight basket of the companies that were removed from the S&P 500 is down 47% this year, almost five times more than the index’s 2020 decline so far.  Just five of the ousted firms have posted positive returns, while oil and gas companies like Chesapeake Energy Corp. and Transocean Ltd. are down 80% or more.

This year, there is talk of removing 30 companies, which would rank among the busiest years for the team that decides which firms to include and which companies to drop.  The S&P analysts are looking at how the COVID-19 epidemic is affecting various publicly-traded corporations—like Capri Holdings Ltd., owner of Versace and Jimmy Choo, which was dropped from the S&P 500 down to the S&P Small Cap Index after it lost $5 billion in market valuation this year.  Travel and leisure firms are said to be candidates for the next round of exclusion.  Meanwhile, two companies that posted double digit gains during the pandemic—medical device company DexCom Inc. and Domino’s Pizza—have been added to the large cap index this year.

Most indexes and index funds—including the S&P 500—are weighted according to market capitalization, which means that companies that are added or dropped at the bottom of the list impact the index’s overall return far less than the mega companies like Microsoft, Apple, Facebook, Google and Amazon.  This presents another puzzling anomaly: the performance of the index—which many people think of as a proxy for the economy—is increasingly unrepresentative of the damage that is being done to the rank and file companies all over the country.  The unusually high turnover in the S&P 500 tells us that there is more disruption going on than the return numbers are telling us.

Other Blogs

You Might Also Like

Why Investing Early Is the Key to Achieving Financial Goals

For long-term investors, knowing the difference between what can and cannot be controlled is the key to both financial success and peace of mind. While all investors would like to believe they can predict or even control the direction of the market, experience teaches us that this is difficult to do. Constructing and managing an appropriate portfolio, while making strategic and tactical allocations based on market opportunities, ideally with the guidance of a trusted advisor, is often the best approach. However, while following markets and maintaining perspective on the economy is important, an even more fundamental key to success is simply to start saving early, stay invested, and remain focused on long-term financial goals. What can investors do to benefit from these principles today?

Read More »

7 Market and Economic Insights for the Second Half of 2023

Major stock market indices made significant gains in the first half of the year due to improving inflation, slowing Fed rate hikes, the absence of a recession, a more stable banking sector, and a strong rally in tech stocks. The S&P 500 has climbed 16.9% with reinvested dividends this year, while the Nasdaq and Dow have returned 32.3% and 4.9%, respectively. Markets have recovered much of their losses from last year with the S&P 500 now 7% from its all-time high.

Read More »

General Disclosure

This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and are subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2, available upon request or at the SEC’s Investment Advisor Public Disclosure site. As with any investment strategy, there is potential for profit as well as the possibility of loss.  We do not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. Past performance is not a guarantee of future results.