Sure. Index funds holdings increase or decrease based on changes in the underlying index they track (in our case it’s the Russell 2000). As you may know, an index fund is a type of passive investment vehicle that aims to replicate the performance of a specific market index, such as the S&P 500 or the NASDAQ. In our case it’s the Russell 2000. The funds’ holdings are designed to reflect the composition of the Russell 2000 index, with the goal of matching its performance as closely as possible.
If AVXL rises, and its market capitalization grows, the weight of AVXL in the tracking funds will increase, and the funds will typically purchase more of the stock to maintain the desired weighting in the Russell 2000 index. On the other hand, if AVXL drops, its weight in the index will decrease, and the tracking funds will sell some of their holdings in the stock.
And of course as more AVXL shares are acquired by index funds, the number of shares available for immediate trading decreases, hence liquidity is reduced. Biotech funds typically want to buy in size, so if liquidity resulting from more shares being bought by index funds is lowered, it makes it harder for institutional investors to acquire a significant number of shares without significantly moving the market. That is why I argue that more shares held by index funds is actually bad.
While it’s not clear exactly which State Street fund owns AVXL, the percentage increase in its holdings of AVXL strongly suggests the fund is an index fund that tracks the Russell 2000.
Shareholders who cheer when an index fund increases its holdings of AVXL because they see it as a sign of positive sentiment are assuming something that is not true. Again, index funds are tracking funds that buy and sell according to the information above. The time to cheer is when you see the likes of biotech funds like Biotechnology Value Fund, Janus Life Sciences Fund or Perceptive Life Sciences Fund starting positions. Sadly, but not surprisingly, there are no biotech funds holding AVXL.
