Masters in Business · Wednesday, September 2, 2026
Rob Arnott explains that indexing, often perceived as passive, has an 'active side' involving about 5% of trading activity. This active component, driven by index rebalancing, can lead to hidden costs and inefficiencies, such as buying stocks at their peak just before they are added to an index and selling them at a low point when they are removed.
“The 5% looks like a hyper growth manager on crystal meth. And the weighting is also an issue.”
“It's legal front running.”
“If you could transact at the price at which S & P announced the decision, not the price at which it becomes effective, you would add 15 basis points per annum. So the indexes lose 15 basis points just from trading costs.”