Image Credit: Alex Nabaum
For years, critics have accused index funds of mechanically buying stocks no matter how much they go up. Now the naysayers have a new critique: Index funds can also mechanically buy stocks no matter how much they go down.
Consider the strange situation at the SPDR S&P Dividend exchange-traded fund, with $20.6 billion in assets. Over the past three years, the ETF nearly quintupled its holdings in Tanger Factory Outlet Centers Inc. — even as shares in the shopping-property owner fell nearly 60%. By the end of 2019 the fund owned an immense 22.6% of Tanger’s stock. (Other ETFs held another 20%.)
Now that Tanger’s stock has halved, the fund has to sell. Short sellers, who bet on falling prices, smell blood and have been swarming Tanger. The shares slumped 10% in two days in late January on record volume, then bounced back….
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This article was originally published on The Wall Street Journal.
Further reading
Benjamin Graham, The Intelligent Investor
Jason Zweig, The Devil’s Financial Dictionary
Jason Zweig, Your Money and Your Brain
Jason Zweig, The Little Book of Safe Money
Maureen O’Hara and Ayan Bhattacharya, “ETFs and Systemic Risks” (CFA Research Foundation, 2020)
Itzhak Ben-David et al., “Do ETFs Increase Volatility?” (Journal of Finance, 2018)
James J. Rowley Jr. et al., “Setting the Record Straight: Truths About Indexing” (Vanguard, 2018)
Itzhak Ben-David et al., “Exchange Traded Funds” (Annual Review of Financial Economics, 2017)