This week’s dramatic failure of Silicon Valley Bank (SIVB) is a timely reminder why market indices are a fictional construct, and why it is difficult for real life portfolios (yes, even index ETFs) to match an index performance.
S&P has announced that Insulet Corp (PODD) will replace SIVB in the S&P 500 index (SPX) on Wednesday. Just like that, life carries on, it’s as if SIVB was never there.
A real portfolio can’t magically erase a failing company by just an announcement. It has to carry or dispose of the failed company, and incur significant losses. Buying into the replacement company entering into an index is also expensive. Insulet stock rallied 7% on news of the announcement.
Proponents of the so called “passive investing” movement love to cite statistics that show active portfolios do not beat the index. As it turns out, neither do index funds. Nothing can beat a fictional construct that can add or delete companies with a flick of a magic wand.