Index changes and losses to index fund investors

    Authors

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

    Comments

    Authors: contact us about adding a copy of your work at STARS@ucf.edu

    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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