Dow Changes Will Trigger Big DIA Trades

September 18, 2013

While DIA can begin to make the changes starting today, I suspect the trustee will wait until Friday and complete the rebalance in one day. It’s also likely they’ll be working with Wall Street trading desks to make sure they get reasonable pricing on what is, after all, entirely public information. In other words, there won’t be an $830 million market order hitting the tape.

So why the one-day trade? My reasoning is twofold:

1) DIA wants to avoid tracking error. With the added uncertainty surrounding the Fed meeting, it’s unlikely the trustee will want to risk having drastically different holdings than the index for several days.

2) This isn’t the first time something like this will be pulled off by a manager of a large unit investment trust. A little more than two years ago, BNY Mellon successfully rebalanced the PowerShares QQQ Trust (QQQ | A-56), which had roughly $25 billion in assets at the time. In 2011, Apple (AAPL) made up 20 percent of the “Q’s.” After the rebalance, Apple’s weight was reduced to 12 percent.

Using fund accounting rules that result in trades being reported on a T+1 basis, QQQ’s managers stopped creations an hour early, and rebalanced the fund with some of the larger trades moving the underlying stock prices, much as we had expected.

While only time will tell how the trustees of DIA will handle these changes, we again have a front seat to see how DIA will handle this challenge, as it publishes its holdings on a daily basis.

I look forward to watching the show.

At the time of this writing, the author held no positions in the securities mentioned. Contact Gene Koyfman at [email protected].


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