Tesla’s Charge Reveals Weak Points of Indexing

Index investing follows a passive investment strategy that seeks to replicate the returns of a benchmark index. The commercial indices on which these strategies are based typically alter what securities they hold every quarter. Index managers therefore need to trade when this occurs, as they are attempting to match and replicate the list of securities as close as possible. This approach not only places restrictions on what securities they can hold, but also when they must trade them. This article looks at the recent addition of Tesla to the S&P 500 index in December 2020 and explores how the trading constraints placed on index funds can lead to increased costs for investors. Read the article here.