| Front
Run The S&P 500: Vanguard Investors, Hedge Your Bets!
By Jim Wiandt
March 29, 2001 |
|
In these topsy-turvy days of volatile markets, who knows what's
up or down? The Dow could be up 250 today, and down 300 tomorrow.
It's a fool's game playing market direction, and every diehard
index fund investor knows it.
One thing we can count on, though, is the index effect. When
a stock goes into the S&P 500, its price will rise - when
one exits, look out below. With over one trillion dollars
indexed to the erstwhile index, the effect, even on large-cap
stocks, is not unexpected. Trading frenzies, coupled with the
actual sales and purchases made by the index funds themselves,
can drive prices up or down significantly in a short period of
time.
And with a not insignificant turnover of a little over 10%, there
are plenty of opportunities over the course of a year. There were
58 stocks in and 58 out in 2000. So far there have only been a
handful in 2001. And as you'll see below, Merrill Lynch expects
there to be at least 13 additions and subtractions by the end
of the third quarter.
So mortgage the house, load up on options . . . fabulous riches
await you.
OK, so the devil's in the details: buy at the announcement
and the odds are you'll get front run yourself. Buy before
the announcement and the stock you picked might not even make
the cut . . . and its price might therefore actually fall
after the announcement. Buy after the announcement and
line up with the fund managers desperately seeking to track the
slippery index.
Well, maybe mortgage your dog's house, and leave it up
to Gus Sauter to outsmart the hedge funds.
While it is true that beating the rebalancing prices is as futile
as beating the market, it's an interesting phenomenon. First of
all, what is "index effect?" In my mind, it means
either one of two things.
- The phenomenon that the above described effect has on index
performance. Because stock prices move higher when they enter
the index for no other reason than that they are entering the
index, the index's performance is artificially
augmented.
or
- (Much more entertaining and cataclysmic) If the whole
world converted to Boglism, like so many Moonies, the market
would become a senseless blob, rendering Efficient
Market Hypothesis dead in the water.
Now that I've convinced you, here are the contenders:
Potential lotto shots . . . these are all promising mid-caps
primping in the foyer:
Source: Merrill Lynch
Could be like slugs in Mississippi mud:
Source: Merrill Lynch
And just for fun, here's who's been in and out:
Source: Standard and Poor's
Source: Standard and Poor's
