It is in everybody\u2019s interest that the reported index fund tracking fund [sic – I meant ‘tracking error’] be minimized: it\u2019s good for the fund sponsors and it\u2019s good for the organizations that calculate their indices. However, the practice of pre-announcing index changes does nothing to address the poor effects on performance that results when many index players are all attempting to take the same investment action \u2013 it serves merely to bury this frictional cost of index investing in the index itself.
\n…<\/b>
\nThere is no way to eliminate the problem \u2013 it is clear that a great many people want index funds and that therefore there will be a large pool of capital that executes trades on the market for reasons that are irrelevant either to the intrinsic value of the security, or to a (possibly informed) view on the price at which such a trade can be reversed. Any market player who does such a thing must expect to incur market impact costs.<\/p>\n
However, Table A-2 and the related discussion make it clear that the methodology currently in use by S&P for the TXPR index has given rise to a whipsaw effect: there were many issues added to the index in the 12Q4 revision for no reason other than an increase in measured volume; and the increase in measured volume arose as a direct result of deletion in the 12Q3 revision.<\/p><\/blockquote>\n
This problem was eventually fixed (I think by imposing a time-out during which reinstatement of issues was not allowed) but I forget when. I’ll update this post if I can ever find the reference! Update:<\/b> It didn’t take long! On November 24, 2012, S&P announced the introduction of the TXPL index and revisions to TXPR methodology, including “Issues deleted from the index are not eligible for re-inclusion until six months after the effective date of the exclusion; they may no longer be added back at the following rebalancing”<\/i><\/p>\n
Look for the research link!<\/p>\n
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