Scientific Beta

Financial Times: "Felix Goltz, research director at Scientific Beta, a data provider, said the paper added to the growing body of research that shows the impact that passive investing has on markets is “huge”. Goltz cited the “price effect” — in essence another phrase for an inelastic demand curve — that occurs when a stock enters an index and passive investors have to buy it."

Financial Times 13/06/2022

"(...) Felix Goltz, research director at Scientific Beta, a data provider, said the paper added to the growing body of research that shows the impact that passive investing has on markets is “huge”. Goltz cited the “price effect” — in essence another phrase for an inelastic demand curve — that occurs when a stock enters an index and passive investors have to buy it. “Even if the price goes up only marginally because of these investors you can make the case that rational investors should not buy the stock because there are alternatives, there are perfect substitutes, so there can’t be any impact on the price of such a stock. But there is evidence that there is an effect,” he said. In the case outlined by Haddad et al, Goltz said investors were buying a stock “even though the price has gone up”, so demand is more inelastic and “you can have additional volatility from shifts in demand”. He said the rise of passive funds investing on the basis of environmental, social and governance principles could exacerbate the problem. With ESG, “the preference [to buy stocks in the index] is becoming stronger”, Goltz said. “People think [companies] are doing something harmful to society if they are not in the index so they care more about whether a stock is included.” As a result, “demand should be more inelastic for stocks included in ESG benchmarks. That should lead to higher prices for these stocks,” Goltz added. Consequently they “would have lower long-term returns. If you don’t care about these [ESG] tastes, you can buy stocks that have higher long-term returns.” (...)"