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Email this2:46 pm
Hi,
I am thinking of moving some money back into the market from my "high" interest savings account. I'm leaning towards using ETFs over Mutual Funds with their lower overall cost. I am wondering how index ETFs work when a company is removed/added in the index ie TSX. Doesn't this lead to a run on the price of Company X with the increased demand/supply?
Thanks
8:10 am
Depends on how broad the ETF is. If you buy into an ETF that tracks a large index (say, the TSX composite), you won't even see a blip. Keep in mind that ETFs are, for the most part, "supposed" to be long-term investments (even though you can buy/banking-scam-email options on them, short them, etc...) so one company isn't going to make a difference in the long run even with a narrow ETF. As for the Mutual Fund vs. ETF debate, if you look at historical returns, something like 60% of all funds failed to meet their benchmarks, so if you had invested in ETFs over the same period, you would have had a 60% chance of beating out the funds. The thing is though, there may be a massive stock rally just around the corner, and investors might make better gains by investing in equity funds rather than ETFs, at least in the near-term. At the end of the day, you need to make decisions based on how much risk you're willing to take on.
11:38 am
Thanks for the reply.
I don't think I explained my question properly. My apologies. I'll try again.
For this argument I'm going to use:
iShare LargeCap 60 (XIU): Asset Value ~ $9B
http://ca.ishares.com/product_.....ticker=XIU
The last company on XIU's list of holdings is MDS Inc (MDS) currently trading at $6.40 and a weight of 0.07% of XIU. MDS Market Capital = $768.88M.
If I take 0.07% of $9B, that gives me $6.3M or ~1M shares of MDS. Except for a couple of outliers the average volume of trading MDS seems to be 100K - 500K per day.
Hypothetically, if MDS was to be removed from the LargeCap 60 index, XIU would be forced to sell all it's shares in MDS and buy it's replacement correct? Since XIU is a passively managed investment, the manager does whatever the market tells him to do. In this case the manager would be required to sell MDS asap. If 1M shares of MDS suddenly became for sale, wouldn't that drive down it's price and flood the market. In contrast, wouldn't the new company to be added to XIU receive a huge increase in demand and prices sky rocket?
I appreciate all the help. Please correct me if I'm wrong or misunderstand an ETF. I want to better understand them before I invest in them and this one point has always confused me.
Thanks.
8:57 am
Read the fund's prospectus. That will tell you how the fund responds to situations like the one you described.
11:13 am
This may be a shot in the dark, but don't most Index ETFs say that they merely aim to replicate the performance of a market index? To me, that would imply that would buy shares of close to all of the companies in the index in proportion to their market caps, but not necessarily every last one. For example, the TSX index funds might not all even have MDS in their holdings. And even if MDS was to be removed from the index, the ones that have it might still hold on to it, or even just sell some of it. I'm sure that the fund managers are aware of the hypothetical situation you described above, and try to avoid that sort of behavior, in order to avoid selling into a glutted market and losing money.
8:38 am
February 20, 2018
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Whats the best way to play the index sp500 nasdaq wilshire russel tsx use an etf or index fund any recommendations? Long and short 1x 2x 3x
Vanguard ishares? Mostly looking for good well structured long position vehicle priced in cdn$ ok?
8:25 am
January 6, 2020
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I'm also looking at purchasing some US equity ETFs myself but I'm waiting to see if the stock market corrects further, 20% correction considered a bear market so still have a ways to go. In a non-registered account, I would look at some tax-advantaged ETFs that Horizons offers (ticker symbol HXS and HULC) and maybe some mutual funds with a corporate class structure, albeit with higher MERs than ETFs. I have already filed my income taxes, now I'm just waiting for my Notice of Assessment to arrive before I can contribute to my RRSP. I have no contribution room left in my RRSP and TFSA. In a registered account, I would definitely look at non-hedged, foreign equity Vanguard ETFs for their low fees. If looking long term, you would be buying at a discount now, maybe dollar-cost averaging or purchase in small increments depending on how the market plays out.
2:06 pm
February 20, 2018
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its hard to track market breadth with the fang stocks. is there an index that doesnt include the bubble stocks with or without tech names
6:58 pm
October 27, 2013
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Bud said
its hard to track market breadth with the fang stocks. is there an index that doesnt include the bubble stocks with or without tech names
There are several 'value' ETFs in the USA using 'value' indices. One is VTV which I suspect does not contain any 'growth' stocks out of the large caps.
Always depends on what one wants. Value based ETFs did poorly in the 2008/2009 financial crisis because the banks got hit hard, and they would be value stocks. Growth stocks have outperformed value stocks the past decade as one might imagine. Going forward? Who knows?
7:04 pm
September 24, 2018
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Getting back to your MDS (small company) question....
First off, changes to the index are announced in advance.
Secondonly, (as mentioned), it attempts to match the index. Therefore, XIU manager may decide to sell only 50k shares a day for as long as it takes... And for the replacement company it needs to buy, it may take the same approach...
But since MDS is such a small holding in XIU, any small change in the price will have next to no effect on the price if XIU.
6:13 am
November 19, 2014
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maxb said
Getting back to your MDS (small company) question....
First off, changes to the index are announced in advance.
Secondonly, (as mentioned), it attempts to match the index. Therefore, XIU manager may decide to sell only 50k shares a day for as long as it takes... And for the replacement company it needs to buy, it may take the same approach...
But since MDS is such a small holding in XIU, any small change in the price will have next to no effect on the price if XIU.
You know that question was asked 11 years ago right ? I doubt the OP is around anymore.
8:09 am
October 27, 2013
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Koogie said
You know that question was asked 11 years ago right ? I doubt the OP is around anymore.
Awww! You spoiled the fun. Was wondering how long it would take..... That said, the concept is still on target for learning purposes.
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