Image Credit: Alex Nabaum
By Jason Zweig | Jan. 31, 2020 11:00 am ET
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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For 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
Articles and other resources:
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)