macrocephalopod

An important addendum is that index funds also trade when they have inflows and outflows (or an AP trades on behalf of an ETF using the create/redeem mechanism). This is important but orthogonal to the main point, which is that index funds basically never trade on price alone

I just realized that @bauhiniacapital wrote about this way more eloquently and also ~5 hours earlier here —https://twitter.com/bauhiniacapital/status/1359919232062873603 …

This thread is a great example of the incredible broken brain gymnastics that people will perform to to misunderstand how index funds work and how they impact prices. Not matter how hard I try to explain it, he keeps repeating the same meaningless point I give up! https://twitter.com/whirlybard/status/1360334892236607489 …

even a basic analysis of etf creation and redemption would show you that fund flows are driven by momentum

furthermore the S&P 500 itself, by virtue of being cap weighted drops companies when they fall which is the definition of momentum investing

To your first point, yes absolutely, but that creates *absolute* momentum (al companies go up together) not *relative* momentum (biggest winners rise more)

To the second point, yes I agree, I don’t think I have ever argued with this, in fact I explicitly talked about index adds/deletes as an exception when a passive ETF would need to trade (as well as new issuance or buybacks)

I guess - I commonly say that the indexing complex is a source of a large amount of incremental momentum investing relative to the status quo it supplanted and feel justified statistically and causally in saying so given the above -- tho I agree mechanically re S&P itself