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Stocks Stand Up To Be Counted

FTSE 100 rebalancing

Image source: ViDi Studio, Phonlamai Photo, Split Second Stock, mkos83 - Shutterstock

What's going on?

On Wednesday, the UK’s major stock market index – the FTSE 100 – will “rebalance”: some stocks will come into vogue while others slide out of fashion.

What does this mean?

The FTSE 100 comprises the UK’s biggest public companies by value – and its performance can help investors gauge the health of British firms and the economy at large. But companies’ valuations can change with the wind, so the FTSE 100 is regularly updated to welcome companies whose valuations have risen significantly and boot out those whose valuations have shrunk.

Retailer JD Sports is probably wearing its big boy pants: it might join the index after its share price sprinted, partly thanks to a profit boost from its acquisition of American sports brand Finish Line. Grocer Marks & Spencer, meanwhile, might be dropped for the first time ever. Its shares have rotted 20% over the past six months as it has closed stores to contend with falling profit.

Why should I care?

For markets: Passive is now massive.

The share of investors’ cash in “passive” funds – which track the performance of stock market indexes often via exchange-traded funds (ETFs) – is growing larger. Indeed, in the US, half of all stock market investment is now passive. Keen-eyed “active” investors may have already bought up individual UK stocks in anticipation of Wednesday’s rebalancing, hoping to profit from fresh demand for them from passive funds mirroring the updated index.

For you personally: Keep an index of indexes.

If you’re invested in an ETF that tracks a changing index, your underlying investments will also shift. And if you prefer to back individual stocks, research by investment bank Citigroup has shown that stocks heavily owned by ETFs tend to rise more than a rising market on average – perhaps thanks to greater demand for those stocks within ETFs. Such stocks may also drop by less than a falling market, helped by slower selling of ETFs compared to individual stocks.

Originally posted as part of the Finimize daily email.

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