If you accept the premise of an efficient market (as most index investors probably do), then Fidelity's argument is bullshit.
They say index funds have to follow the index, and -- in this concrete example -- buy Facebook, because it's going to be included in the S&P500.
That's true.
Unfortunately S&P management did not whisper this little piece of insider's information into Fidelity's ear. It's public knowledge. And so other actors besides index funds have already tried to exploit that nugget of information. Just as Fidelity is doing.
So it's already been priced in.
The hypothesis of an efficient market does not assume that all actors in the market are actively exploiting every bit of information, just enough of them to move prices to their "fair" points.
If you don't accept the premise of an efficient market, then index funds don't interest you much and you have other strategies to follow.
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[ 4.5 ms ] story [ 15.8 ms ] threadThey say index funds have to follow the index, and -- in this concrete example -- buy Facebook, because it's going to be included in the S&P500.
That's true.
Unfortunately S&P management did not whisper this little piece of insider's information into Fidelity's ear. It's public knowledge. And so other actors besides index funds have already tried to exploit that nugget of information. Just as Fidelity is doing.
So it's already been priced in.
The hypothesis of an efficient market does not assume that all actors in the market are actively exploiting every bit of information, just enough of them to move prices to their "fair" points.
If you don't accept the premise of an efficient market, then index funds don't interest you much and you have other strategies to follow.