According to the article (and the discussed research) this was only a minor factor:
"The researchers also explored the possibility that index changes are more predictable today than in the past, leading sophisticated market participants to trade ahead of the events. They concluded that this played only a minor role in their findings, however."
The two main factors being:
"...an increase in migrations over time from the S&P MidCap 400 index, and an overall increase in the market's ability to provide liquidity to those investors seeking to buy and sell around the time of index changes.
The additional liquidity has 'made it easier for everyone to trade, and as a result, the prices move less.' says Dr. Greenwood.
And with more stocks migrating to the S&P 500 from the S&P MidCap 400, midcap funds are selling as S&P 500 funds are buying, leading to 'a wash' in demand, he says.
This factor is actually lessening over time. The BlackRocks and Vanguards of the world have dozens, even hundreds, of index funds - all with different benchmarks and goals. When a stock is "rebalanced" out of one fund, it ends up being added to some other fund that the same company manages. So the transfer occurs as a notation on the internal books; no actual arbitrage-able trade actually happens. This is even happening in the ESG space - we are starting to see fund "pairs" - one fund tracks the companies that meet the specific rules of that fund, and the other tracks the companies that do not.
Note that this isn't perfect - index fund A has more assets under management than index fund B, etc. But as index investing grows, the actual investor inflows and outflows are what dominate, not rebalancing moves.
> This is even happening in the ESG space - we are starting to see fund "pairs" - one fund tracks the companies that meet the specific rules of that fund, and the other tracks the companies that do not.
This is very interesting. Do you have any examples of these funds?
There is an easy to understand white paper about this concept at CRSP’s website. Their particular ESG indexes aren’t investable, but it seems to be only a matter of time given that all their others are.
