The Index Tracking Strategies of Passive and Enhanced Index Equity Funds

UNSW School of Banking and Finance Working Paper No. 2003-19

40 Pages Posted: 16 Dec 2003

See all articles by Alex Frino

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Teddy Oetomo

Schroder Investment Management Indonesia

David R. Gallagher

Rozetta Institute

Multiple version iconThere are 2 versions of this paper

Abstract

This study represents the first empirical examination of the daily trading and portfolio configuration strategies of index and enhanced index equity funds. We find index and enhanced funds earn returns and exhibit risk commensurate with underlying indices. Relative to index funds, enhanced index funds are found to incur lower trading costs. We document that index and enhanced index funds experience significantly higher trade difficulty during index revision periods. In terms of portfolio configuration, in cases where index and enhanced funds do not perfectly mimic the underlying benchmark, both fund types exhibit a greater propensity to overweight stocks with higher liquidity, larger market capitalization and higher past performance. Similar criteria are also documented for enhanced funds' holdings outside the benchmark. For non-index constituents, enhanced funds exhibit a higher propensity to ride 'winners' and sell 'losers'.

Keywords: Passive funds, Enhanced index funds, Tracking Error, Index funds, Portfolio configuration, Index revisions, Trading strategies

JEL Classification: G23

Suggested Citation

Frino, Alex and Oetomo, Teddy and Gallagher, David R., The Index Tracking Strategies of Passive and Enhanced Index Equity Funds. UNSW School of Banking and Finance Working Paper No. 2003-19, Available at SSRN: https://ssrn.com/abstract=463320 or http://dx.doi.org/10.2139/ssrn.463320

Alex Frino

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Teddy Oetomo

Schroder Investment Management Indonesia ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

David R. Gallagher (Contact Author)

Rozetta Institute ( email )

Sydney

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,057
Abstract Views
3,779
rank
22,098
PlumX Metrics