By 2024, the number of delistings from the ASX has reached sixty, including high-profile exits such as CSR and Boral, both of which left the ASX in July following multi-billion dollar buyouts.
As a result, index ETFs must remain vigilant about their performance indexes, not only to track stock market winners and losers, but also to monitor which companies are removed from the index entirely.
While corporate delistings are not a new trend, Global X investment strategist Marc Jocum highlighted the benefits of a “rules-based methodology” for index ETFs.
Jocum explained that many ETFs allocate their holdings based on size. This diversified approach helps mitigate the impact of delisting a stake, particularly a smaller one.
“The advantage of ETFs, especially index-based ones, is that you will continue to hold the winners, which are the companies that are growing in size, profits and popularity,” Jocum said. .
“So it’s almost a Darwinist approach to investing; invest in the strongest who survive and get rid of those who are not able to survive. An ETF, through the rebalancing process, simply allows investors to not have to worry about delisting.
Jocum added that companies typically provide notice of their delisting, allowing ETF providers to adjust accordingly.
“If a company is delisted, it must adequately notify the regulator and investors. And you have index providers, who are pretty smart in the way they build the index. They will know when a company is delisted,” Jocum said.
“If it’s a huge position… they’ll be very aware of the impact it could have on the market as a whole.” For example, instead of selling everything in a single day, they may do it gradually over several days, just to ensure that there is enough liquidity and that there are no difficulties in the market.
“This speaks to the transparency and liquidity of the ETF, as it is able to make these changes with relatively limited impact on the market as a whole.”
Adam DeSanctis, Vanguard’s head of ETF capital markets for Asia Pacific, reiterated that changes in index composition are rarely sudden.
Still, he agrees with Jocum that index funds benefit from increased diversification.
“One of the many benefits of owning an index fund is that it allows for diversification, thereby mitigating the effects of volatility in your portfolio,” he said.
DeSanctis explained that Vanguard’s stock funds and ETFs are generally “fully replicated.” This means that Vanguard owns each underlying stock and aims to match reference weightings across all constituents, allowing for minor deviations and optimizations.
“Similarly, we ensure that sectoral and industry constraints remain strict, to avoid any deviation from the benchmark,” he said, adding that the company uses processes complex internals as a result.
“There are significant internal controls, proactive monitoring/alerting and independent risk monitoring throughout the portfolio management and basket creation process to ensure alignment with the benchmark.”
This, DeSanctis noted, ensures that funds stay on course.
“Our funds and ETFs always track their respective benchmarks closely, during periods of calm and volatility.”
