Have you ever bought roses on Valentine’s Day? Odds are you paid a premium to buy those roses for your loved one. However, you weren’t the only one. The increased demand and competition for roses on Valentine’s Day drives up the prices. Simple supply and demand.
This concept can be translated to the stock market, more specifically, investments that track specific indices (i.e. index mutual funds or exchange traded funds (“ETF”)). This is because when an investment tracks an index, it has to hold the same companies that are listed on that specific index (i.e. S&P500). When an index announces the companies listed on the index (Index Reconstitution day), there is increased trading for those companies. All of the index mutual funds and ETFs have to sell the companies that are no longer on the index and buy the new companies that are being included.
