Trading Opportunities with Index Funds

Index funds have longed been tagged as auto pilot investment vehicles with low investment fees. Because of their passive nature, one would expect that active trading within index funds is unnecessary. When the composition of an index changes the index funds must change as well, thereby creating unexpected trading opportunities.

The S&P 500, the Russell 1000, the Russell 2000, and the Russell 3000 are among the industry's most widely recognized benchmarks. With the market downfall experienced since early 2000, many stocks, particularly from the tech industry, have seen their market capitalization reduced. Stocks that once were part of a large-cap index like the Russell 1000 have migrated down into the Russell 2000 index, which tracks small-cap stocks. The Russell 2000 index has also dropped several of its fallen tech stars, further complicating the mix of investments that comprise this index.

Because indices are usually divided into value and growth components, you also need to factor in the weighting that value and growth objectives have on these benchmarks. Value stocks have enjoyed somewhat of a resurgence in performance over the past year that has caused the Russell indices to be over-weighted with value stocks. Resetting these benchmarks to the traditional 50-50 mix will mean value stocks being recast as growth stocks.

The by-product of all this index re-shuffling is volatility, which spells opportunity for savvy traders who focus on exploiting index changes. SS&C's trade order management solution, Antares, can help you track and trade against the index funds.

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