But yes, undoubtedly it has increased the market cap of most companies in the prominent indices around the world. You are talking about, in most cases, a completely passive vehicle that only contemplates market cap (for most purist index funds) to reflect the basket of shares/securities it will hold. Think about that for a second.... how easy it would be to manipulate such a mechanism if it wasn't for active investors maintaining market fundamentals. Imagine such a scenario - company X is currently a top 10 company on the ASX based on market cap. The current sellers' of shares in this company decide to increase their offer price for the shares exponentially (aware of the necessary buying activity of an index fund). A normal investor would contemplate this increase and obviously not buy. After all, it's overpriced! A passive index fund doesn't consider such fundamentals. It simply purchases the shares at the inflated price to keep its holdings in alignment with the respective index. Even more disturbing is that the purchase at the inflated price has now increased that company's standing in the index and will attract further investment. Then contemplate the billions of dollars flowing into index funds every year.
A ticking time bomb.
WMI Price at posting:
$1.22 Sentiment: Hold Disclosure: Held
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