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.

3 comments:

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