
Drastic makeover looms for S&P 500 - zoomablemind
https://www.bloomberg.com/news/articles/2020-05-16/drastic-makeover-looms-for-world-s-most-followed-stock-index
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hanoz
I'm convinced that the markets, which, let's remember, were high on the hog
all throughout the obvious impending catastrophe of this virus sweeping in
from the east at the beginning of this year, until the moment reality was
shoved in their faces in the form of an outbreak in Italy, have not yet
absorbed the enormity of the long tail of this pandemic and the lockdown.

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echelon
Is it a worse place to put your money than USD or housing? Where do you
suggest we put our investments?

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Jorge1o1
Not giving official financial advice here because I would need to understand
your individual circumstances, but if you have the view that equities on the
whole are going to fall, you can buy bonds, uncorrelated assets (think gold,
but calculate the correlation yourself), low beta stocks, delta-neutral option
strategies

There’s really a lot you can do

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bobbyi_settv
Bonds when interest rates are near zero?

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edge17
Corporate bonds, not treasurys

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Klinky
VLGSX(Vanguard Long-Term Treasury Index) has actually had really good ytd
returns. Dunno how long it will last.

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01100011
There is a part of me that thinks we will see permanent changes from
COVID-19... but then there is the part of me that remembers how quickly
society can forget lessons, and how new generations can rise up and carry the
world forward in unforeseen ways. I am hopeful that we will not forget this
experience, but I know how far away 2008 and 2001 are in people's minds
already, and I think in ten years this will be as talked about as the Spanish
Flu was before COVID.

Can anyone show me an example where 'this time will be different' ever proved
to be true?

Don't get me wrong, there were some changes coming that will happen and be
blamed on the virus, like the death of some major retailers, a commercial real
estate crash, the death of nightclubs and bars, etc. But those are
evolutionary changes which have taken decades to materialize.

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dweekly
When was it true that "this time it's different?"

The dot-com implosion meant that you can't go public without revenue. The bar
for IPOs then shifted far upward (even irrationally so) and has remained there
since.

9/11 permanently moved the bar on state surveillance, war powers granted the
president, and screenings. That mostly hadn't happened after prior hijackings
or accidents.

The Columbia disaster killed the Space Shuttle Program.

There are many events that permanently transform affected systems. Coronavirus
is a once in a century curveball and we are in the first chapter of many in
the COVID-19 book. Many things will change. We don't know how many yet.

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pao
> “It was more happenstance than actual foresight that those companies would
> end up getting worse,” said Keith Gangl, portfolio manager for Gradient
> Investments

Sounds like sour grapes to me. I imagine this is the line this guy is feeding
all his investors when they ask why they're paying him 1% and getting beat by
the S&P.

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CapriciousCptl
Since passive funds mostly weigh investment by market cap or some other
indicator of size that’s already gotten smaller for these firms I’m not sure
swapping out the smallest 30 would make up more than a few percent of
allocated funds.. far from drastic for the passive investor. From the firm
perspective it’s also hard to quantify the effect on stock prices from dropped
firms when the reason they’re being dropped is their market cap shrunk—
there’s a chicken vs egg quality to the situation. Obviously some institutions
will be forced to sell but the market is generally efficient in the long run—
it’s not like getting dropped affects the underlying business value. In the
short term the businesses will have less access to newly issued equity capital
however.

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dilandau
Won't alter the price very much, as the institutional boys following this
would have assumed it would happen.

The market is very decidedly not the economy. Everything indicates disaster
for the gdp, which is a measure of economy. But the market is sitting about
where it was 1 year ago. People expect that America is going to pull through.
Sentiment may change but right now its pretty bullish. Lots of retail
investors driven by FoMo, of course, and people who rushed in to buy the dip.
Google trends is illustrative of the point.

But I think the corporate debt, unemployment, a possible trade war, supply
shortages, and eventual bankruptcies are going to send it back down at some
point.

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anonu
So there's a problem with thrashing... Where deeply down companies may drop
out of the index on this rebalance but come back in sometime down the road, in
a quarter or 2. The CRSP indices, for example, solve this problem by buffering
between the market cap segments. The S&P should introduce a similar mechanism
to it's methodology. This would also reduce index rebalance trade aheads and
thus reduce costs.

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stevenwliao
> the index committee is probably hesitant to add more technology firms

This surprised me. I had thought that S&P 500 was an objective list of large
cap stocks, without subjective decisions about which companies to include.

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ceejayoz
Nope. Lots of opinion involved, especially in the "representative of the US
economy" bit.
[https://en.wikipedia.org/wiki/S%26P_500_Index#Selection_crit...](https://en.wikipedia.org/wiki/S%26P_500_Index#Selection_criteria)

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dcl
Calling it now, this is going to result in a huge scandal. Due to the sheer
size of investments based on the index, influencing those opinions will become
very valuable for certain players.

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perl4ever
There could be a scandal, but how would it be "huge"?

You could throw darts at a list of large companies and weight them with some
really dumb rules and get an index that's pretty close to "the market"; that's
basically what the Dow is.

The difference between even the S&P 500 and a total market index (i.e. all the
smaller stocks that exist) is pretty insignificant to returns (and recently
bad for them), and I believe the total market funds have become more popular
than the traditional S&P 500 ones anyway.

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stevenwliao
The timing of when individual stocks are added or removed from the index seems
like valuable information to holders of those stocks.

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perl4ever
It's one form of possible insider trading among many.

In any case, one of my points is, say you want a fund that tracks the stock
market, a Vanguard index fund maybe, and you are concerned about their S&P 500
fund being gamed or "front-run" or whatever you want to call it. You don't
trust it. They have a "total market" fund with the same 0.03% expenses. Plus,
the AUM are the same or a little more, so you don't even have to go against
the herd. So if something did happen to the S&P 500 fund, it seems like it
would be inconsequential. Who needs it? And people are going to notice if
something is wrong because the differences between the S&P 500 fund and the
S&P 500 index, or between the fund and the total market, are so small.

What you need to worry about is some obscure index fund where everybody is not
aware of what it _should_ return. Like, I don't know, USO?

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stevenwliao
As a holder of S&P 500, it won't look big. As a majority stakeholder in a
company that is on the border, it will.

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qeternity
[https://outline.com/HjUNun](https://outline.com/HjUNun)

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airstrike
My own personal view as someone who works in Wall Street (but not in trading)
is that the market is currently too optimistic in the wake of surprisingly
positive (or "not terrible") Q1 2020 earnings reported in early April. The
problem is that those earnings don't really say anything about the world we
live in today, because (a) the U.S. only really started panicking in mid-
March, when most of Q1 was already over and (b) companies did their very best
to make Q1 look as good as possible since they realized Q2 was going to be
absolute shit anyway. That includes trading long-term, sustainable results
(good) for near-term gains (bad, but which they felt "necessary" given the
current environment) including not only cost-cutting and "rightsizing" but
likely some liberal / aggressive accounting.

At work, people say we're in the second inning of the COVID-19 game, and
although I hate baseball, I tend to agree. Valuation multiples have
essentially recovered to pre-COVID-19 levels. The S&P 500 was down only 10%
this year (as of some date last week). Intuitively, does anyone feel the
economy is just "10% worse"? Especially coming off of record highs that many
already felt were in need of a correction...

I think the "second wave" everyone keeps worried about is more likely to be
defined not only by a surge in cases but perhaps more significantly by the
massive market crash as the current house of cards begins to unwind. Grab your
hot dogs, the third inning is about to start.

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sytelus
I don't think market is optimistic (ex. projections from pretty much every
investment bankers), but instead reality is extraordinarily distorted by
massive cash infusion and govt's commitment to not let market go down at any
cost. This makes asset pricing as dictated by US government as opposed to
market forces (same as in countries like Russia). This is first time in
history where stock price is rising literally in proportion to job loss and
revenues loss!

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airstrike
The jury is still out on whether those measures will be effective, though. To
date, they really haven't done much. Unemployment is at 15% and expected to
hit 20% in the next month or so, to name just the most obvious data point.

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KittenInABox
I think it’d be more concerning if this wasn’t the case...

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cbanek
I guess while the average passive investor doesn't care (in that this
reshuffling will happen under them mostly without their knowledge), it seems
like a great front-running opportunity for the banks and active managers. A
lot of money gets put into the S&P 500 and it must create quite a bit of buy-
side demand.

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kasey_junk
Just so we are clear, front-running means something very specific in trading
and active managers preparing for index changed isn’t it.

In fact this sort of change has long been priced into the market, it won’t
change prices much at all when it happens.

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cbanek
Ah, the great "it's priced in" \- but is it really? I guess nobody can really
know, unless you're one of those that says the market is always correct.

And yes, there's front running an individual trade, but I was thinking a much
longer timeframe, although I don't know what the right word for it would be.
Would that be considered momentum? Pre-momentum?

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kasey_junk
No idea what the right word for what you are saying is. But it’s not front-
running. Using front-running here would be similar to if I described a social
engineering hack as a “zero-day”. Except worse as front running is frequently
legally defined by groups like the sec & finra.

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neonate
[https://archive.md/yWOah](https://archive.md/yWOah)

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cracker_jacks
I wonder how buying high and selling low (the strategy of S&P 500 holders)
will work out in this new COVID era.

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david-gpu
What makes you think that SP500 index funds, which are cap-weighted, amount to
buying high and selling low?

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cracker_jacks
Companies leave the index when they fall below a certain market cap. Companies
enter the index when they are above a certain market cap. That is literally
the definition of buying high and selling low.

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david-gpu
The turnover rate is low and the weight of those companies in the index is
very small. That said, I prefer broader indices.

