Index funds do need to trade, but only on a few specific events - mainly index adds/deletes and corporate actions (e.g. new issuance, buybacks, mergers and acquisitions).
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the biggest winning ETFs get larger inflows, statistically, and have for over 7 years - which - because there are different indices -- drives relative outperformance of names therein -- which is explicitly a momentum effect
Yes I completely agree, eg the names in the ARK ETFs are clearly going up because of inflows to those ETFs, I have never claimed otherwise! But importantly *they are all going up together* in fact they have become super correlated purely by virtue of being held by ARK.
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I mean there are tons of momentum distortionary effects, but my favorite is just the reduced liquidity and the minor price distortion of redem/creation
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I just take issue with "retail brain fantasies" around momentum effects from passive investing. The momentum effect is innate to any form of "passive" investing that is not the Vanguard All World index bc the entire causal premise is some relative weight went up in the pastpic.twitter.com/wvf1T5hn7M
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I think we agree on literally everything here in fact! I am not saying passive ownership or fund flows are not important, I am just saying that one or two specific beliefs that seem weirdly commonly held are wrong.
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I think when people are saying "Index funds are momentum investors" they mean to say that "index investing is driving momentum investing in the overall market", and I believe this statement is correct -- and may be technically wrong bc, technically they reweight intra index
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