Do Index Fund Managers Trade Opportunistically Around Index Changes? An Empirical Examination of S&P 500 Index Funds

Journal of Index Investing, Vol. 1, pp. 58-64, Winter 2010

17 Pages Posted: 18 Aug 2011

See all articles by Lee M. Dunham

Lee M. Dunham

Creighton University - College of Business Administration

Thuy H. Simpson

University of Nebraska-Lincoln

Date Written: October 1, 2011

Abstract

Numerous studies have documented abnormal returns available to investors around index changes. S&P 500 index fund managers face competitive pressures to replicate the index as close as possible or risk the loss of investors to competing funds. As a result, these fund managers have incentive to take actions to reduce any under performance. We examine whether S&P 500 index funds are able to opportunistically trade around index changes between the announcement date and the effective date in an effort to reduce tracking error. We do find evidence of these funds using changes to the S&P 500 as a source of opportunity to capture performance and reduce tracking error. This evidence suggests that the wealth transfer from index fund investors to arbitrageurs around S&P 500 index changes documented in the literature may be far less pronounced than originally thought.

Keywords: index funds, S&P 500 index, index arbitrage, tracking error

JEL Classification: G11, G14

Suggested Citation

Dunham, Lee M. and Simpson, Thuy H., Do Index Fund Managers Trade Opportunistically Around Index Changes? An Empirical Examination of S&P 500 Index Funds (October 1, 2011). Journal of Index Investing, Vol. 1, pp. 58-64, Winter 2010. Available at SSRN: https://ssrn.com/abstract=1911724

Lee M. Dunham (Contact Author)

Creighton University - College of Business Administration ( email )

United States
(402) 280-2637 (Phone)

HOME PAGE: http://https://business.creighton.edu/faculty-directory-profile/433/lee-dunham

Thuy H. Simpson

University of Nebraska-Lincoln ( email )

Lincoln, NE 68588
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
135
Abstract Views
633
rank
214,488
PlumX Metrics