Just to clarify, investors do not participate in security lending ('sec lending') aka stock loan programs to make money when the SP of their long position doesn't rise -- that's factually incorrect. Sec lending is widely used in the institutional (and to some extend the retail/HNW) space as a means to monetize/generate additional yield on holdings for which there is a borrow demand. It is subject to certain risks for the holder that are laid out by brokers in the SLAs (stock loan/lending agreement) and depending on what assets are made available it can be a near risk free means to add some juice to the portfolio, particularly if it's very liquid assets where replacement risk is nil/near nil when rates will be similar to current interest rates (or more) in developed countries. The less liquid and constrained the asset or the higher the demand vs supply (i.e. low short availability) or the larger the size of the position held/lend etc., the bigger the potential risk for the holder for which they are ought to be compensated via their share of the financing rate paid by the borrowing party. Financing rates can easily go into double digit territory on an annualized basis and paying 15-20% on low inventory items is not unusual in global markets. That's it in a nutshell, although it is a bit more complex and subject to risks that risk managers and PMs ought to carefully monitor as sec lending tends to bite one in the %^$ during the worst times if not managed correctly (see 2008 as the prime example). So the causality implied in DW's statement is simply incorrect.
Taking a step back to the addition of new stocks to the index, this will trigger decision processes for institutional investors which differ depending on their investment approach as well as the implementation approach. The following is a simplified version just to cover the high level points. Discretionary investors whose performance, risk and/or portfolio characteristics are benchmarked to the index will have to make a conscious decision whether to a) not buy the added name(s), b) buy the added name(s) but add at a proportionate weight exceeding the index weight (i.e. overweigh the name) or c) buy the added name(s) but add at a proportionate weight lower than the index weight (i.e. underweigh the name) or d) add at the same weight as in the index. That decision will be typically based on the PM's fundamental views of the name, unless the name added to the index is so large that for risk management purposes a position may be initiated regardless of fundamental views to mitigate tracking error and/or factor risks. This would be atypical unless your dealing with an index where a certain name accounts for high single or low double digit weight. In developed markets in the past certain banking or basic industry names could fall into that category although they were usually not new additions. So the addition to an index doesn't necessarily have to trigger an investment by discretionary managers, but since the name is now in the index they will have to make an active decision whether to hold it or not, and that decision will have to be revisited again and again over time, especially if its index weight grows.
Index funds don't buy shares with the intent to 'make money' the same way a discretionary manager does by trying to pick those names that will relatively outperform while not owning the rest of the industry or universe, and index funds are the largest participants of sec lending programs. Index funds buy the names because they are in the index and are thus required to hold them to ensure their index fund replicates the performance of the index with a little deviation from the underlying asset as possible. This typically means they are acquiring newly added securities at a weight similar or equal to that in the index in order to minimize the tracking error of their fund vs the referenced index. It is important to understand that depending on the weight of the name in the index and past performance characteristics of that name in addition to other factors, the index fund PM may decide to not add a name or add a name in a staged fashion vs. adding a full weight position at once. This could be due to a number of factors from access to flow and not trying to push the price to build the required position, a negligible index weight, high/low SP volatility, cash/redemption/subscription implications, and a range of other factors all of which will be determined in the way they may impact slippage and whether the trade off vs. the rest of the basket and its impact is negligible etc. For equity indices pure replication approaches are quite straightforward unless one's dealing with substantial fund size impacting rebalancing implementation whilst any leeway with regards to return approximation (i.e. the TE) offers the PM more flexibility on restructuring his book. (Note this is primarily applicable to equity index funds, fixed income indices and index funds are a different beast altogether and beyond the scope of this discussion.)
I wouldn't go as far claiming that being added to an index is "not always good news" as regardless of whether the size of funds benchmarked to this index will trigger immediate inflows for index rebalancing purposes or not, being added to an index is pushing the name actively in front of institutional decision makers and their clients (!!) who will have to take an active view on the name now and also going forward. And that is what current holders should want: more exposure to potential investors that may increase the daily trading volume as part of price discovery and who have the capital to buy blocks of 1, 2, or 3 million shares at the time as the share price moves higher. It's also important to realize that 99% of the institutional AUM pursues long-only strategies, so while maybe a few more people as a response to increased awareness of DW8 following the index rebalance may consider to short the name, the relative purchasing power of the institutional long camp vs short camp should be clear. Overall this is a step in the right direction and it's putting the firm onto institutional investors' radar at time of the rebalance and thereafter. This is happening during a time when the SP isn't hot as it was 2 months ago and has retreated substantially taking a lot of momentum out that many instos try to avoid, there are new fundamental developments happening at the firm and we are approaching the second half of the year which tends to be better for sales generally in the industry. While I doubt there are 100s of billions of AUD benchmarked to this index on the passive side triggering a wave a passive buying in the next week (which would IMO actually handicap the SP all things considered in the short-term), the addition to the index comes actually at a very opportune time all other things and circumstances considered.
DW8 Price at posting:
9.4¢ Sentiment: Buy Disclosure: Held