sell covered calls against your position). VTWO technically does have options available, but the range of expirations and strikes is much narrower, while the bid-ask spreads are extremely wide.Īs a result, IWM can be preferred over VTWO if you trade more frequently and/or with bigger size, or if you want to use options (e.g. “If there are parts of the market that have been hijacked and pushed higher by retail investors, perhaps just avoiding those will provide active managers the ability to outperform in the coming years,” said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company.The main advantage of IWM over VTWO is greater liquidity.Īt the moment, Yahoo Finance is showing average daily trading volume (in the last 3 months) 91,651 shares for VTWO and 24,218,219 for IWM.Īnother advantage of IWM is the availability and liquidity of options - it is among the top ETFs by options volume. While lumbering index funds are at the mercy of meme-mania and the rebalancing schedule, stock pickers can move fast to exploit extreme market action. Ultimately, all of this should add up to good news for active money managers. But with a semiannual rebalancing schedule, AMC now accounts for 20% of the fund. At the other end of the spectrum, the $21 million SoFi 50 ETF (SFYF) is based on an equal-weight gauge, meaning it aims to hold roughly the same value of shares in each of its constituents. The fund now holds 1.75% of AMC, Bloomberg data show. While that means it can keep pace with AMC’s rally, it’s automatically more exposed to potentially unstable investments. IWM is based on a cap-weighted index, meaning it allocates according to a company’s market cap. And neither is immune to meme-stock distortion. Pickers’ Delight Indexes are created using all sorts of methods, but the most common are cap-weighted and equal-weighted.
Thanks to its regularly scheduled rebalancing, it had zero shares of AMC by Friday. AMC made up 21% of the $1.8 billion Invesco Dynamic Leisure and Entertainment ETF (PEJ) at one point on Wednesday. For some, the timing works out, merely by happenstance. But that would bring more transactional costs to funds, which can be a big problem for passive vehicles charging rock-bottom fees. “Style drift can reduce the odds of capturing the premiums when they appear.” The obvious solution would be to rebalance more often.
Bloomberg “Research tells premiums such as those associated with small cap and value stocks are generally delivered by a subset of the asset class,” said Wes Crill at Dimensional Fund Advisors, a pioneer of quant investing which has $637 billion under management. AMC will likely remain in many value funds until their rebalancing comes around. The premium tops all Russell 3000 stocks that have enough of an analyst following to generate a price target, according to Bloomberg data, and more than double that of GameStop - the next over-valued stock. AMC shares currently stand at almost 10 times the level analysts see it trading a year from now: $5.25. But the wild surge of recent weeks makes it among the most-expensive stocks in the Russell 3000. Not too long ago, AMC shares looked cheap and beaten down, meaning it qualified for many value factor strategies. The fund is drifting away from its strategy, or investing style. For quants who like to slice and dice stocks by characteristics like how expensive they appear or how much their prices swing around - known as factors - it’s all known as style drift. Around 68% of the $14.5 billion iShares MSCI USA Momentum Factor ETF (MTUM) had to be changed because of the huge market rotation that occurred since its last semiannual rebalance. One of the most-dramatic examples occurred in May, though it was unrelated to the meme-fueled drama. Given the speed of the rallies in the likes of AMC and GameStop, even tracking an index that rebalances quarterly - a relatively frequent schedule, by industry standards - leaves a fund susceptible to distortion. Balancing Act The cash and chaos exposes a glitch in the plumbing of many funds, which is that they’re often tied to the rebalancing schedule of the index they follow.
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