Thu 9 Nov 2006
Yes, indexing has a ton of good benefits, but there can also be some interesting side-effects for the astute observer…
This quote is from Bill Cara’s blog on the effects of the re-balancing of the Dow Jones AIG commodities index in January of 2007:
On this assumption there will be heavy buying of Nat gas, coffee and crude and large selling of nickel zinc, wheat and copper. Substantial selling is likely in nickel and zinc; less selling in copper and aluminum. We suspect these changes will occur during the January roll-period.
There are other salient points in the post, specifically that no one can predict how much an effect this re-balancing will have as there’s no easy way to tell how much money is being invested based on the index.
I find it very interesting that this phenomenon is occurring, and I’m sure some nimble traders are trying to capitalize on this special situation…