Monday, October 4, 2010

The AP doesn't know what a value weighted index is.

I've pretty much come to the conclusion that most journalists who write about finance don't really know much about finance.  That's because they have degrees in journalism, so they know lots about ... (I'll figure that bit out later).

Anyhow, consider this gem from the AP.

As soon as the total value of the company's shares edges above Exxon's, Apple will take over the top spot in the Standard and Poor's 500, the market index used by most professional money managers.
That means that billions of dollars invested in funds that track the index will have to shift their holdings to reflect Apple's new weighting. Exxon, meanwhile, may see its share price fall from the same effect. That slide could be accelerated by hedge funds and technical traders who make bets based on the rebalancing of major indexes and would be primed to short the shares of Exxon.

This is, of course, completely and utterly untrue.  The S&P 500 is a value weighted index.  If you hold the stocks in it, their weights in your portfolio will adjust at exactly the same rate as the weights in the index.  That's the beauty of a value weighted approach.

Note to finance students.  Don't believe all that you read on the interwebs.

Note to would be finance journalists:  Take some finance classes.

HT: Felix.