Abstract

http://ssrn.com/abstract=651950
 
 

References (29)



 
 

Citations (3)



 


 



Index Changes and Unexpected Losses to Investors in S&P 500 and Russell 2000 Index Funds


Honghui Chen


University of Central Florida

Gregory Noronha


University of Washington, Tacoma - Milgard School of Business

Vijay Singal


Virginia Tech

March 2005


Abstract:     
We find that, due to arbitrage around index changes, investors in S&P 500-linked funds lose between 0.03% and 0.12% annually, while investors in Russell 2000-linked funds lose between 1.30% and 1.84%. In dollar terms, the losses range from $3.75 billion to $6 billion a year for the two indexes together.

These losses are an unexpected consequence of index fund investors evaluating index fund managers based on tracking error in an effort to control agency costs. 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, particularly for Russell 2000-linked funds where the index changes are predictable. We propose solutions aimed at resolving the problem that can be implemented by indexing companies, index fund managers, or fund investors.

Number of Pages in PDF File: 52

Keywords: Index funds, Index changes, Agency costs

JEL Classification: G23, G32

working papers series





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Date posted: January 22, 2005  

Suggested Citation

Chen, Honghui and Noronha, Gregory and Singal, Vijay, Index Changes and Unexpected Losses to Investors in S&P 500 and Russell 2000 Index Funds (March 2005). Available at SSRN: http://ssrn.com/abstract=651950 or http://dx.doi.org/10.2139/ssrn.651950

Contact Information

Honghui Chen
University of Central Florida ( email )
PO Box 161400
Orlando, FL 32816
United States
407-823-0895 (Phone)
Gregory Noronha
University of Washington, Tacoma - Milgard School of Business ( email )
1900 Commerce Street
Campus Box 358420
Tacoma, WA 98402-3100
United States
Vijay Singal (Contact Author)
Virginia Tech ( email )
Blacksburg, VA 24061
United States
5402317750 (Phone)
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