alt Hacker NewsThis seems a sensible thing to do. If you change the rules on how things end up on your index, you force everyone using that index to reevaluate it. Your index is now perceived as more volatile (and probably is), and all the finance people need to reevaluate the risk of their index funds and decide if it is now 'growth', 'high growth' or whatever bucket it belongs in based on the new risk profile. And then all the portfolios need to be rebalanced. Which all takes time, more time than was being proposed. The sensible thing to do is to create a new index with the new rules.
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Sp500 is not passive. Keeps updating the rules every few years. https://www.reddit.com/r/stocks/comments/1tvuhgy/sp500_100_y...
See top relevant changes in 100 years
They have to be rebalanced every quarter regardless. And I'm not sure how many people would actually sell due to the inclusion of a single company. They're very loud about it, but no evidence that this is causing a significant amount of selling.
At a fundamental level, an index is supposed to reflect the market. If the current market is IPO-ing unprofitable companies at absurd multipliers, the index should reflect that. Because that is the market.
The longer major indexes exclude these companies, the further the index strays from representing the market, and the worse they do their core job of tracking it.
It's not the index's fault that market is pushing out overpriced and unprofitable companies.
> sensible thing to do is to create a new index with the new rules
It depends. Indices aren’t funds. They aren’t meant to balance investor interests. They’re meant to communicate some metric about the market.
The S&P tells you how big companies are doing in an index optimized to balance representation against trading cost. So in 2005, float was taken into account for weighting (versus just market cap). This made sense. Also, since the start, the S&P 500 has been a committee-based index. Not rule based. This has made it successful; if you want stable and unchanging, you never went for the S&P 500.