Q: I’ve heard that this week the FTSE 100 will get a reshuffle. Can you explain what this is and what does this mean for me as an investor?
A: That’s right, this week on 3rd June the FTSE 100 had a reshuffle using the market capitalisations from 28th May. The FTSE undergoes a quarterly rebalancing to update for rising or falling valuations of stocks – but with this rebalancing coming in the wake of the pandemic, there were a few big changes, with some big names such as easyJet facing relegation.
The proportion of investors’ money in ‘passive’ funds (those that track the performance of stock market indices) is growing – often via investment into ETFs (exchange traded funds). Research shows that stocks which are owned by ETFs climb more in a rising market, because of higher demand and because ETFs are slower to sell, stocks may drop less in a falling market too.
So, what does this mean for you as an investor? Active investors might consider buying certain high performing stocks (the ones that will be promoted from the FTSE 250 to FTSE 100) ahead of a rebalancing. This provides an opportunity to benefit when the investment funds mirroring the FTSE 100 buy up stocks to reflect the updated index.
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