Effects of Creeping Indexation?
October 30, 2010 - Big Ideas, Commodity Futures, Fundamental Valuation
What are the implications for investors of a trend toward strategic and tactical allocation to index proxies (exchange-traded funds and derivatives) rather than individual securities? The July 2010 paper entitled “On the Economic Consequences of Index-Linked Investing” by Jeffrey Wurgler provides an overview of the effects of index-linked investing on stock prices, risk-return trade-offs, investor portfolio allocation decisions and fund manager skill assessments. The September 2010 paper entitled “Index Investment and Financialization of Commodities” by Ke Tang and Wei Xiong investigates the effects of increased investing during the last decade in commodity indexes. The October 2010 paper entitled “The Financialization of Commodity Futures Markets or: How I Learned to Stop Worrying and Love the Index Funds” by Scott Irwin and Dwight Sanders surveys research on the impact of commodity index fund growth on commodity price behavior. Using results of prior research and recent data on indexation investment levels, index returns and component asset returns, these papers find that: Keep Reading