Title

Index changes and losses to index fund investors

Authors

Authors

H. H. Chen; G. Noronha;V. Singal

Comments

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Abbreviated Journal Title

Financ. Anal. J.

Keywords

TACTICAL ASSET ALLOCATION; TRACKING-ERROR; Business, Finance

Abstract

Because of arbitrage around the time of index changes, investors in funds linked to the S&P 500 Index and the Russell 2000 Index lose between $1.0 billion and $2.1 billion a year for the two indices combined. The losses can be higher if benchmarked assets are considered, the pre-reconstitution period is lengthened, or involuntary deletions are taken into account. The losses are an unexpected consequence of the evaluation of index fund managers on the basis of tracking error. Minimization of tracking error, coupled with the predictability and/or pre-announcement of index changes, creates the opportunity for a wealth transfer from index fund investors to arbitrageurs.

Journal Title

Financial Analysts Journal

Volume

62

Issue/Number

4

Publication Date

1-1-2006

Document Type

Article

Language

English

First Page

31

Last Page

47

WOS Identifier

WOS:000239394700008

ISSN

0015-198X

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