[Kon-Peki]

This factor is actually lessening over time. The BlackRocks and Vanguards of the world have dozens, even hundreds, of index funds - all with different benchmarks and goals. When a stock is "rebalanced" out of one fund, it ends up being added to some other fund that the same company manages. So the transfer occurs as a notation on the internal books; no actual arbitrage-able trade actually happens. This is even happening in the ESG space - we are starting to see fund "pairs" - one fund tracks the companies that meet the specific rules of that fund, and the other tracks the companies that do not.

Note that this isn't perfect - index fund A has more assets under management than index fund B, etc. But as index investing grows, the actual investor inflows and outflows are what dominate, not rebalancing moves.

[malshe]

> This is even happening in the ESG space - we are starting to see fund "pairs" - one fund tracks the companies that meet the specific rules of that fund, and the other tracks the companies that do not.

This is very interesting. Do you have any examples of these funds?

[Kon-Peki]

There is an easy to understand white paper about this concept at CRSP’s website. Their particular ESG indexes aren’t investable, but it seems to be only a matter of time given that all their others are.