The index inclusion anomaly undermines the advice to invest in index funds

Evidence

If a purchase or sale of stock conveys no information if it is not, for instance, the result of a corporate insider unloading stock before bad news becomes public then even a large purchase or sale should have an effect on price that is “close to zero” (Scholes 1972, p. 182). For example, if a stock is selected for inclusion in the S&P 500 then large purchases by index funds are necessary, but those purchases are “informationless.” Present holders of the stock in question should not need any significant inducement to sell it and to invest instead in one or more of its close substitutes. … That there was an effect could therefore be seen as an anomaly whose existence was evidence against efficient-market theory (Shleifer 2000, pp. 21-23, 48-50). The “investment advice implied by the Efficient Market Hypothesis” that is, to invest in index funds “may itself be undermining the efficiency of the stock market” (Morck and Yang 2001, p. 32). — Donald MacKenzie, An Engine, Not a Camera, 461

Categorization

• SEED: The performativity-of-index-funds twist — the very advice implied by EMH undermines the efficiency it assumes — is a strong essay hook about self-undermining doctrine.
• XREF: connects to: Arbitrage erodes the profitability of exploiting the index inclusion anomaly — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 462; Index-fund growth created an informationally-inefficient price anomaly its own theory rejects — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1152; Index funds profit more from suppressing competition than enabling it — Yanis Varoufakis, Technofeudalism: What Killed Capitalism, 936 (+3 more)

Broader Connections

• Index-fund growth created an informationally-inefficient price anomaly its own theory rejects #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 1152
• Arbitrage erodes the profitability of exploiting the index inclusion anomaly #complicates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 462
• Anomaly-identification followed by trading strategies shrank the anomalies themselves #complicates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1151
• Index funds profit more from suppressing competition than enabling it #expands (0.80) — Yanis Varoufakis, Technofeudalism, 936
• Index funds directly implemented financial economics’ efficient-markets claims #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 134
• Indexing practice made CAPM’s single-portfolio implication seem less egregious to economists #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 385