Avoiding rush-hour traffic

Posted by: Swindells FP, on June 17, 2015.

The last business day of May is among the busiest for share traders around the world.

It is one of the days that MSCI, a large index provider, re-balances many of its indices; restating the companies it believes to be representative of a particular market.

For investors who track one of MSCI’s indices, this is important because they have to buy or sell shares to reflect the changes. Some trades will be fairly small, as minor adjustments are made to individual weightings, but in some cases, entire holdings need to be dropped or acquired.

This activity creates a spike in the volume of shares traded as some of the world’s biggest fund managers are motivated to go into the market at the same time. The volume of shares traded on the German and UK markets on the last day of May was around 60% higher than on the day before and the day after¹. This can have some interesting consequences for share prices.  

Here is an illustrative example of what can happen when a share enters the index, requiring index trackers to buy.


Index trackers

Source: Dimensional. For illustrative purposes only.

The index provider announces the index changes some time before the effective date. This causes an initial spike in volume and price, followed by a longer run up in the share price. On the effective date there is a bigger spike in trade volume and price. In some markets, much of this activity occurs in the last few minutes of trading as fund managers enter the closing auction to ensure they get the same price as the index – whatever that price is. After the effective date, the price generally settles a little lower.

Funds that track an index are a sensible way for some people to gain exposure to a market, but there are trade-offs to be managed.

This is one of the reasons we use investment managers that, among other things, have more flexibility and are able to trade stocks whenever the expected benefits outweigh the potential costs.

It’s the trading equivalent of cutting your journey time to work by having the freedom to avoid rush-hour traffic.

The differences on each individual trade might be small but, as is so often the case with investing, over a lifetime these small differences add up.

If you’d like the freedom to avoid the rush-hour, use the contact form here to arrange an initial consultation or call us on 01825 76 33 66.  

¹Source: Dimensional / Bloomberg


Enter your email

Get free investment, pensions and wealth management news and advice.

* indicates required

*We will never share your details with any third party.


Client Stories

Book a consultation

Your Name (required)

Email (required)

Phone Number


Employment Status


What you would like to talk about?


Enter exactly what you see above

Enter your email to receive free relevant news and updates.

* indicates required

*We will never share your details with any third party.

Latest… View all

Putting the current stock market decline in context

There’s no doubt hyperbolic headlines depicting the recent falls on the world’s financial markets are potentially anxiety-inducing. With the FTSE 100 Index falling to its lowest level since April 2017, the effect of the headlines is to promote a sense of uneasiness; we’re here to remind you that this shouldn’t be the case. Instead of […]

Read more →

Inheritance Tax is an avoidable tax

It is often said that Inheritance Tax is an avoidable tax, but many of us somehow fail to avoid it. Why is this? In our experience, clients’ failure to plan effectively is a result of the following perceived problems: Speed – How often will the thought of having to survive 7 years from the date […]

Read more →

What went wrong with the forecasts?

Reading the tea leaves Investors at year-end are inclined to reflect on the 12 months gone and muse on what the coming year might bring. Aware of this appetite for speculation, themedia tends to feed it with forecasts. These articles can be fun to read, but are even more so a year later. In January […]

Read more →

What should investors make of bitcoin mania?

Bitcoin and other cryptocurrencies are receiving intense media coverage, prompting many investors to wonder whether these new types of electronic money deserve a place in their portfolios. Cryptocurrencies such as bitcoin emerged only in the past decade. Unlike traditional money, no paper notes or metal coins are involved. No central bank issues the currency, and […]

Read more →