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Watch out for ETFs during index rebalancing

Iuliya Sunagatova/Iuliya Sunagatova/iStockphoto

Commodity traders learned the hard way that you can't forget about the power of exchange traded funds.

The same goes for index rebalancing.

As every portfolio manager knows, every three months the S&P/TSX Composite Index and the S&P/TSX 60 Index are adjusted to get rid of companies that no longer fit the indices' criteria, and add those that do. For most quarters, including the current one, the rebalancing is treated as a rather blasé affair because so little changes. (The coming rebalancing takes place on Friday.)

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But as Chad Dale, vice-president of research at ITG Canada, notes, "there are also an increasing number of internationally based ETFs focused on resources which contain significant Canadian holdings, and changes to these indices (also effective Friday) produce very large trades and price movements."

He offers an example to illustrate just how misleading simply watching the major indices can be. Composite indexers will look at a stock such as AGF Management Ltd. and think they simply need to sell 160,000 shares this Friday. However, S&P/TSX Dividend Aristocrat indexers will need to buy 1.9 million shares, so the aggregate buy across all indices is 1.89 million.

Examples of non-composite ETFs and indices that are rebalanced this Friday include Van Eck Gold Miners ETF ($ 9.2-billion (U.S.) in assets under management) and iShares S&P/TSX Dividend Aristocrats ETF ($880-million (Canadian) in AUM).

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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