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Let's say I own shares in the MSCI World ETF. Company X, where I am an employee, is currently not part of it. What happens when in ie a year Company X gets added to the ETF - Is my owning stock in it considered insider trading?

If so, would it mean I need to sell my existing share in this ETF or should no longer buy more of it?

MarkJeglic
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    Insider trading is not just owning stock in the company you work for. It is making decisions about buying or selling that stock using information that only an employee of the company would have. – chepner Jan 14 '21 at 13:01
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    If so, employee stock purchase plans would be illegal. :) – JohnFx Jan 14 '21 at 14:55
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    This is indirectly answered by learning what exactly insider trading is (this is probably a duplicate of that). – NotThatGuy Jan 14 '21 at 22:22
  • Why would the typical investor in a fund know or care what particular stocks the fund owns? Isn't that one of the reasons for buying funds, so that you don't have to concern yourself with details of individual stocks? (I own an S&P 500 index fund, but I'd be hard pressed to name even one of the stocks in the index.) Worst case, you've got plausible deniability :-) – jamesqf Jan 15 '21 at 18:04
  • @jamesqf Guess the name of a large-cap U.S. company. With the S&P500, you'll probably be right. :) – reirab Jan 15 '21 at 21:03
  • While the situation described isn't problematic at all, the opposite situation is. If you have inside information that your company is going to be added to a large index (meaning that you know this before the information is publicly available) and you buy your company's stock before it's added and profit off the bump in the stock price that results from being added to the index then you would be insider trading. (For those not aware, being added to a major index often results in a stock price bump due to index funds being suddenly required to buy a lot of it.) – reirab Jan 15 '21 at 21:06
  • You would need to check your terms of employment and company policy. – copper.hat Jan 15 '21 at 21:19
  • @reirab: But that's just guessing, I wouldn't actually KNOW :-) But if it bothers you, switch that to an international fund, or one that invests in a broader index, like the Russell 2000 – jamesqf Jan 16 '21 at 04:08
  • @reirab AFAIK only the top heads of the company know this. Employees might have a vague idea of something an employee said to an other employee. Proving that it was insider trading from a lowly employee which does not have access to that information directly is IMHO very hard. CEOs &directors on the other hand are immediately suspects and should (IMHO obviously) be held way more accountable on this kind of stuff. – Bakuriu Jan 16 '21 at 12:34
  • @Bakuriu Yes, that sort of thing would normally be kept as quiet as possible until the formal announcement to investors, but there would usually still be at least some lower-level employees who would need to know at least somewhat in advance. You're right that most wouldn't, though. And trying to prevent insider trading or the appearance of it is precisely the reason they wouldn't. I've been in a position before where I needed to know for sure about a merger that involved a publicly-traded company before it was announced, though. It's not that uncommon, but it's kept to a minimum. – reirab Jan 16 '21 at 15:58

2 Answers2

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No.

Owning a stock is not trading a stock.

See https://en.wikipedia.org/wiki/Insider_trading.

If you are in a position of the company where you know (positive or negative) information about the company which would materially impact the stock price, you only commit insider trading when you use that knowledge before it becomes public knowledge.

Jens
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RonJohn
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    It may also be worth mentioning that making trading decisions about bundles including the stock, and on competing stocks based on insider knowledge are also discouraged. – fectin Jan 15 '21 at 00:31
  • @fectin make the edit. Someone will approve. – RonJohn Jan 15 '21 at 02:01
  • There could be a stretch where it happens; you buy the ETF knowing that your stock is going to be added in the future and that shortly afterwards your company is going to announce something big that will make its stock price skyrocket. But that is going to be a narrow window. – Yakk Jan 15 '21 at 15:26
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    @Yakk If the OP has a history of regularly buying this stock (e.g. dollar-cost averaging), and they continue in the same vein, they could probably defend their actions. However, if they make an unusually large purchase (or, if every purchase is irregular/unusual), they might run into trouble. – jpaugh Jan 15 '21 at 15:36
  • @Yakk How would someone know what an ETF is going to do in the future? They don't usually announce their planned portfolio changes. Would officers of the company be involved in the ETF purchasing their stock? – Barmar Jan 15 '21 at 16:48
  • @Barmar There are rules for how you get into and out of various indexes. An ETF following an index could be predictable. You could have insider information about what the ETF is going to do. My point is that "it is an ETF" isn't a 100% defence. – Yakk Jan 15 '21 at 17:04
  • @Yakk I was thinking of ordinary mutual funds, not index funds. – Barmar Jan 15 '21 at 17:08
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    @Yakk Honestly, even in that window, it seems pretty unlikely that you'd get into trouble, at least with most ETFs. An individual stock usually represents a small enough part of a fund that, even if you had inside information that one of the component stocks was going to skyrocket, the gains would be so diluted that the ETF wouldn't change much. It's still probably technically a violation of the law, but probably pretty unlikely to be noticed or cared about given the relatively tiny effect. – reirab Jan 15 '21 at 21:01
  • @reirab I mean, this is insider trading. Unless you run around saying "suckers I made billions off insider trading" or something equally stupid, you aren't likely to be noticed. The SEC "more than 50" such cases per year, and most of them get settled out of court. I mean https://www.quora.com/How-common-is-insider-trading read that, and now you can't do it yourself, but plenty of other people can and do and not get caught. – Yakk Jan 15 '21 at 21:13
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Let's say I own shares in the MSCI World ETF. Company X, where I am an employee, is currently not part of it. What happens when in ie a year Company X gets added to the ETF - Is my owning stock in it considered insider trading?

The only way this would be insider trading is if you were providing non-publicly available information to the investment managers of the fund. For example if you had the numbers for the quarterly report a week before they were being released and you gave the numbers to MSCI.

The opposite is true. If you work for company X and the ETF/Mutual fund owned stock in your biggest competitor (Company Y) your boss wouldn't fire you for having a conflict of interest.

mhoran_psprep
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