Since indexes are not actual holdings, can their performance actually be precisely mimicked with an index fund?
Things like reallocation to reflect market cap (ok, sell those going down), removing issues from index and adding new ones (*), dividends, etc.
**but with actual investments could the sale of lower-weighted issues cover the actual cost of more shares of higher-weighted issues?
***ok, but there will most likely be an actual loss from selling a declining issue and buying a newly-added issue (especially given real-world things where that very thing often causes declines in the exiting issue and gains in the added issue).
Lastly (and it doesn’t pertain to my topic really, but anyway) the S&P 500, though heavily diversified, essentially has the objective of adding more allocation to issues AS THEY RISE… which is somewhat at odds with some basic investing strategies regarding rebalancing and not increasing positions at a higher cost basis continuously.
The S&P 500 almost feels like a perpetual momentum index.
Extreme example (all made up). Issue #500 (XYZ, pretend it’s 0.01% of index, 100 bbl market cap) experiences instantaneous close-to-next-open of 5,000%. XYZ now 5 trillion market cap.
Allocation now must be 5%. All other 499 issues (yeah it’s actually 505 total but beside the example) go up by 20% and stay there a while. XYZ not #1 but still high. New real money going into index fund must buy all those, and also XYZ at its new price and allocation.
Then the top 50 issues decline 10%, XYZ is new #1 and appreciates. More new money going into that. and a few days later XYZ goes back down 99.xx% to where it started. XYZ then falls out of S&P 500; every X number of shares purchased at high price must be sold at near 100% loss.
I feel like in that general scenario that a whole boatload of real money would be lost (as I typed that out I realize maybe in an index somehow it’s not as bad, but with real money, I dunno…)
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