The Big Tech boom is causing headaches for all-powerful index providers on Wall Street, who can send billions of benchmark-tracking dollars on the move with just a stroke of the pen.
Mike O'Rourke, chief market strategist at JonesTrading, joins BNN Bloomberg to discuss his bullish take on the markets.
The proposals offer fresh ammunition for critics of the passive-investing boom, who have long pointed out such strategies are more active than they appear. Any adjustments in an index reveal the hidden human hands behind the benchmarks. Behind the proposals are longstanding rules for regulated investment companies that limit any single security to 25 per cent of a portfolio and the aggregate weight of the largest holdings — those with a five per cent representation or greater — to 50 per cent. In the industry it’s often dubbed 25/5/50.
“Some clients are really pushing us to consider capping the standard Russell 1000 Growth Index, for example,” she said.Passive funds have been grabbing market share from their active rivals in the past two decades, thanks to rock-bottom costs and the perceived shortcomings of discretionary stock pickers. Still, some market participants like to point out that this index revolution is less radical than it appears.
For example, in its proposal, Russell presents a capping threshold at 20/4.5/48. That’s different from the Nasdaq 100, whose methodology calls for 24/4.5/48, and S&P, whose cutoff is 24/4.8/50. The disparity likely reflects diverse approaches to determine the best way to reduce the probability of a breach occurring on a regular basis, according to Yoshimoto at Russell.
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