TheMotorcycleBoy wrote:tjh290633 wrote:hiriskpaul wrote:In practice there is not really any such thing as a totally passive fund. Passive funds set out to track an index, so buying/selling is at least required as index constituents and weights change.
They don't have to buy or sell as weights change. The market takes care of that.
They do have to buy if they have a net inflow of cash and sell if there is a net outflow. Also as constituents change.
TJH
I think I understand. So if a FTSE100 index tracker fund has amongst its holdings companies A and B, both of which have 1000 shares in total issue, then I assume the fund will have equal numbers of shares of each firm e.g. 10 shares each. So far so good?
Assuming that yesterday an A share was priced at £2 and B was at £5, then if today their values change, e.g. today A=£3 B=£4, then because the issued numbers of the shares in the market place of A and B, remains the same, the fund in this scenario, needs to do no buying or selling.
However, if A buys back 100 of its own shares, then its size in the market falls by 10%, and hence for the fund to balance itself, it will most likely sell a single A share from it's holding.
Correct?
If A buys back 10% of its shares the remaining shares will rise 10% to keep the mkt cap the same, provided everything else is unchanged. So a dumb tracker using mkt cap won't have to do anything.