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….
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