Saturday, March 23, 2013

The Zen of Index Liquidity: More Is Less

You would think that the whole point of a stock index is to be, well, an index of the stock market's performance.  But, according to a WSJ report, thanks to the popularity of exchange-traded funds, or ETFs, stock indexes have in recent years been doing double duty as investment vehicles. At the same time, there have been subtle but important changes in the way indexes are constructed.

Bottom line: The indexes aren't measuring exactly what they used to.  It is a lot easier to manage an ETF if the stocks that underlie it are easily traded. If, instead, the stocks are illiquid, there is a risk their prices will get artificially inflated when money flows into the ETF. The opposite can happen when money flows out….

Read all about it at

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