Measuring the Costs of Index Reconstitution: A 10-Year Perspective
KEY TAKEAWAYS
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Index-tracking funds seek to match an index’s performance. This goal may lead to constraints and implementation costs that hurt returns.
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Our 10-year study identifies significant costs for index-tracking funds from demanding immediacy during index reconstitution events.
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A better investment approach would be a daily process that spreads turnover across all trading days, avoiding the costs of demanding immediacy and allowing for a consistent focus on stocks with higher expected returns.
