What’s Going On Here?This week, the UK’s major stock market index – the FTSE 100 – will be reshuffled, some of its stocks flushed, and investors dealt a new hand. What Does This Mean?The FTSE 100 comprises the UK’s biggest public companies by value, and its performance helps investors gauge the health of both corporate Britain and the wider economy. It’s also regularly updated to factor in stocks whose valuations have risen, as well as boot out any whose values have shrunk. And since the ongoing pandemic has drastically changed plenty of companies’ fortunes, there are a few big changes this time around.
Take airline EasyJet and cruise operator Carnival, whose shares have – perhaps understandably – more than halved since coronavirus all but halted global travel. They’ll probably drop out of the group of 100 “blue chip” companies as a result, and likely be replaced by firms like tech giant Avast and medical equipment-maker ConvaTec – both of whose industries have benefited from the outbreak. Why Should I Care?For markets: Passive’s still massive.
The proportion of investors’ cash in “passive” funds – which track the performance of stock market indexes, often via exchange-traded funds (ETFs) – is getting bigger. In fact, half of all stock market investment in the US is now passive (tweet this). Keen-eyed “active” investors, then, might’ve bought up certain high-performing UK stocks ahead of this week’s rebalancing. That way, they’d hope to profit when the investment funds mirroring the FTSE 100 buy up stocks to reflect the updated index.
For you personally: Indexpertise.
Even if you prefer individual stocks to ETFs, it’s worth keeping an eye on which ones are being added to the various indexes. Studies suggest that stocks which are heavily owned by ETFs climb more than average in a rising market, perhaps thanks to the higher demand. And since ETFs are slower to sell, stocks may also drop by less than average in a falling market too. | 