Not really. It's one of the, if not the top index. A lot of passive investors (myself included) put a large chunk of their investment funds in ETFs and/or index funds that just track the S&P500. Not being included means a massive reduction in the number of people indirectly holding their shares.
Index inclusion/exclusion is something that must have been studied by some academic - I wonder what their conclusion is. My hypothesis is that the stock price would be lower given the significant reduction in quantity demanded.
This is a big deal (in a good way, IMO). Companies have a very real disincentive to go public with a shareholder-rights-unfriendly listing now, since a large portion of the passive investment universe will be prohibited from ever buying.
I see this as a case where everybody wins: the default option ends up being friendly to shareholder rights, but if you really want to and are in an advantageous position you still have the option to list go public with non-voting/less-voting shares if you want to gamble.
Well...kinda. I don't know if they were invented for this specific purpose, but preferential shares do prevent activist shareholders from imposing their will on public companies, forcing them to take actions that are very short term. Preferential shares actually prevent that from happening, which is great.
This is a new dimension in that struggle. I don't know how this will pan out...
One thing I don't understand is why don't index funds take preferential shares into account when deciding which ones to buy/sell? Couldn't that be factored into the decision engine's rules/algorithms?
Most index funds do not actually hold the index. They look at the index as a guide of the types of stocks to buy, but the fund manager still makes buy/sell decisions on any stock they want including those not in the index.
Index funds are actively managed. They difference from traditional funds in that they hold their stocks much longer. A traditional active fund is always asking the question "what stocks will go up the most in the short term" - when they get this right they do very well, but when they get it wrong they pay a lot more transaction fees which cuts their gains significantly. Because an index fund is asking "which stocks are worth holding for a long time" they don't have the pressures to find the best short term performing stocks and so their transaction fees are much less.
This is completely wrong - not how ETFs work at all. If you have a large block of SPY you can redeem it for the index constituents. If you have a large block of the index constituents, you can redeem it for SPY.
When the SPY price rises above the price of the constituents, arbitrageurs (firms like Jane Street) will go and buy the constituents and create some SPY shares (and sell them for a profit). Similar for if the SPY price falls below the corresponding weighted sum of the constituents.
You're both right. There are two broad classes of exchange-traded products (ETPs): exchange-traded funds (ETFs) and exchange-traded notes (ETNs).
ETFs have a creation-redemption mechanism [1]. This keeps tracking error [2] low. It also forces ETFs to actually hold their component stocks.
Some clever financial engineers noticed they could approximate most of an index's performance with a few names and some clever trading. They issue ETNs. These are notes issued and backed by usually an investment bank that promise to pay interest in a way linked to an index. They have no requirement to hold the index's constituents.
