Indexing Has Costs

There is a lot of literature on how indexing beats active management. For most people it makes more sense to index than to try and beat the market. However, indexing has become a victim of its own success in many ways.

Visa is up 10% since S&P announced its inclusion in the S&P 500, even though the market is down. That has tacked on $7 billion to the market cap of Visa. Since approximately 12% of the market is indexed to the S&P 500, indexers are paying up $840 million for the shares of Visa they will buy. The same has happened with Wells Fargo and Citigroup to a lesser degree when S&P announced they will add to their weightings. This is a hidden costs to investors who index.

At this point it still makes sense for most investors to index, but as the strategy gains popularity the costs will rise.


Anonymous said...

You can also index via VTI (Vanguard), which owns all the biggest 2000 or so stocks and then samples the remaining 3000. Same fees as SPY (.09%) and just as liquid, at least for smaller investors.

Tsachy Mishal said...

Going with a lesser known index like you suggest might be the better move.

nicasurfer said...

1.8 billion c shares today wow