How Discretionary Decision-Making Has Created Performance and Legal Disclosure Issues for the S&P 500 Index

48 Pages Posted: 2 Apr 2021

See all articles by Bernard S. Sharfman

Bernard S. Sharfman

RealClearFoundation

Vincent Deluard

affiliation not provided to SSRN

Date Written: February 27, 2021

Abstract

When investment funds track the S&P 500, the index becomes more than just a list of 500 companies. The focus then turns to the financial and regulatory issues that arise from the discretionary decision-making of its Index Committee. The discussion of these issues and their implications should be of extreme interest to both investors and regulators. This discussion involves: how Sharpe’s equality will hold in practice, what kind of companies may still be impacted by the index effect, how we are to understand the expected returns versus risk of a broad based market portfolio, whether funds that track the S&P 500 are to be considered actively managed or passive, the S&P 500’s suitability as an “appropriate” benchmark index, and what kind of legal disclosures are required in the use of the index. As a result of our discussion, including our empirical findings, we do not find the S&P 500 index to be desirable for either tracking or benchmarking purposes, even though our proposed legal disclosures should mitigate any potential legal liability for its continued use.

Our paper makes contributions to the literature on index managers and the SEC’s disclosure policy for open-end investment management companies. Most importantly, it will help guide the investment decisions of tens of millions of investors who are currently invested in, or are considering investing in, funds that track the S&P 500.

Keywords: prospectus, form n-1a, open-end investment management companies, index, sec, securities, s&p 500, index effect, legal disclosures, index funds

JEL Classification: K2, K22, H72, H75, J26, J32

Suggested Citation

Sharfman, Bernard S. and Deluard, Vincent, How Discretionary Decision-Making Has Created Performance and Legal Disclosure Issues for the S&P 500 Index (February 27, 2021). Available at SSRN: https://ssrn.com/abstract=3794306 or http://dx.doi.org/10.2139/ssrn.3794306

Vincent Deluard

affiliation not provided to SSRN

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