In 2024, the number of ASX delistings reached the high sixties, including high-profile exits such as CSR and Boral, which both left the ASX in July following multibillion-dollar takeovers.
As a result, index-tracking ETFs must stay vigilant with their performance benchmarks, not only to track the winners and losers in the stock market but also to monitor companies that are removed from the index entirely.
While company delistings are not a new trend, Global X investment strategist Marc Jocum emphasised the advantages of a “rules-based methodology” for index-tracking ETFs.
“As soon as companies get kicked out of an index, or if they delist, or any corporate action really, our ETF will essentially mirror what’s happening,” Jocum told InvestorDaily. “So we’ve got a portfolio management team that handles all these listings or corporate actions.”
Jocum explained that many ETFs allocate their holdings based on size. This diversified approach helps mitigate the impact when a holding, especially a smaller one, is delisted.
“The great thing about the ETF, especially index-based ones, is you’ll continue to hold the winners, which are the companies that are growing their size, growing their earnings, growing their popularity,” Jocum said.
“So it’s almost like a Darwinistic approach when it comes to investing; invest in the strongest that survive and get rid of the ones that aren’t able to survive. An ETF, through the rebalancing process, just makes it easier for investors to not have to worry about delistings.”
Jocum added that companies typically give notice of their delisting, allowing ETF providers to adjust accordingly.
“If a company delists, they have to give appropriate notice to the regulator, to investors. And you’ve got index providers, which are quite smart in the way that they will construct the index. They will be aware of when a company is delisting,” Jocum said.
“If it’s a huge position … they will be very well aware of the impact it could have on the broader market. For example, instead of selling everything on one day, they may phase it in over multiple days, just to ensure there’s enough liquidity and there’s no distress in the market.
“That’s a testament to the transparency and liquidity of the ETF wrapper, because it is able to make these changes with relatively muted impact on the broader market.”
Adam DeSanctis, Vanguard’s head of ETF capital markets for Asia-Pacific, reiterated that changes to index composition are rarely sudden.
“Changes to index composition will generally be made two-to-five business days in advance of index implementation of anticipated corporate events,” DeSanctis told InvestorDaily.
Nevertheless, he agreed with Jocum that index funds benefit from enhanced diversification.
“One of the many benefits of owning an index fund is that it allows for diversification, dampening the effects of volatility in your portfolio,” he said.
DeSanctis explained that Vanguard equity funds and ETFs are generally “fully replicated”. This means Vanguard owns each underlying stock and aims to match the benchmark weights for all constituents, allowing for minor deviations and optimisation.
“Similarly, we ensure sector and industry constraints remain tight, to avoid any deviation from tracking the benchmark,” he said, adding that the firm utilises complex internal processes to suit.
“There are significant internal controls, pro-active monitoring/alerting and independent risk oversight throughout the portfolio management and basket creation process to ensure alignment versus benchmark.”
This, DeSanctis noted, ensures funds stay the course.
“Our funds and ETFs always track their respective benchmarks closely, through periods of calm and through periods of volatility.”
