Index Changes and Losses to Index Fund Investors

Posted: 8 Aug 2006

See all articles by Honghui Chen

Honghui Chen

affiliation not provided to SSRN

Vijay Singal

Virginia Tech

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business

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.

Keywords: Portfolio Management, Equity Strategies, Asset Allocation, Performance Measurement and Evaluation, Performance Measurement, Private Wealth Management, Mutual Fund Studies, Investment Industry, Other

Suggested Citation

Chen, Honghui and Singal, Vijay and Noronha, Gregory, Index Changes and Losses to Index Fund Investors. Financial Analysts Journal, Vol. 62, No. 4, pp. 31-47, July/August 2006. Available at SSRN: https://ssrn.com/abstract=922296

Honghui Chen

affiliation not provided to SSRN

No Address Available

Vijay Singal

Virginia Tech ( email )

Blacksburg, VA 24061
United States
5402317750 (Phone)

Gregory Noronha (Contact Author)

University of Washington, Tacoma - Milgard School of Business ( email )

1900 Commerce Street
Campus Box 358420
Tacoma, WA 98402-3100
United States

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