As I pointed out last week, Russell Investments changed the roster of stocks it tracks in its stock indexes. The completion of the reconstitution process last Friday created a lot of action among the stocks affected by the moves, once again showing the influence that mutual funds that track these indexes have on the overall market.

The big bump
In order to stay correlated to their benchmarks, index funds had to sell shares of the companies removed from the indexes, while buying shares of newly added stocks. So what you might have expected to see is that shares of companies dropped from the index would fall dramatically on Friday, perhaps recovering after the selling pressure had dissipated. Conversely, stocks added to the index would bump higher on Friday and then fall back.

As it turns out, that's exactly what happened to most of the stocks dropped from the index that were mentioned in last week's article:


Change on June 26

Change on June 29




Blockbuster (NYSE:BBI)



Ingersoll-Rand (NYSE:IR)



Capstone Turbine (NASDAQ:CPST)






Fannie Mae (NYSE:FNM)



Source: Russell Investments, Yahoo! Finance.

Hemispherx Biopharma (AMEX:HEB), on the other hand, rose almost 19% on Friday after being added to the Russell index, but fell back 10% on Monday. All those changes came despite relatively flat moves of less than 1% for the overall market on those days.

The cost of indexing
From their magnitude and predictability, it's pretty clear that these moves were artificially induced by index fund activity. That's the downside of indexing: Fund managers must follow set rules, and other investors can take advantage of their behavior. As a result, index funds received less for shares they had to sell, and they paid more for the stocks they had to buy.

Given how much money is invested in index funds, you can expect these types of moves to occur any time an index makes a change to its component stocks. They definitely create costs for long-term index investors. Over time, though, index funds have still performed well compared to their active counterparts -- and even with occasional index changes, index funds remain a valuable tool for investors looking for low-maintenance and more predictable investments.

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Fool contributor Dan Caplinger knows there's no such thing as a sure thing, even if it worked out this time. He doesn't own shares of the companies mentioned. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy isn't a one-day wonder.