r/letfs
If a company reaches 10% of the S&P 500, does passive investing create a feedback loop?
Author questions if passive S&P 500 ETF inflows create a self-reinforcing feedback loop for companies reaching 10% index weight.
Maybe I’m missing something, but if a company becomes 10% of the S&P 500, every dollar flowing into an S&P 500 ETF automatically sends 10 cents into that stock. If the stock keeps outperforming, its weight gets even larger, which means future passive inflows buy even more of it. I know active investors still determine prices and passive funds don’t magically make stocks go up forever, but it feels like there has to be some self-reinforcing effect there. At what point does that actually become meaningful? Or is the impact of passive investing much smaller than people think and I’m overestimating it?
The write up for The Weird Portfolio talks about this and uses it as one of the main arguments for the allocation. You might find it interesting : https://medium.com/p/99c0154d1c4a
I'm still undecided but I think The Weird Portfolio or something like it would probably make a good diversifier when youre partly invested in LETFs.
TLDR : small cap value, reits, and gold