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Research Spotlight | The S&P is Actively Managed

Research Spotlight | The S&P is Actively Managed

November 14, 2019


The Bottom Line: While the S&P is seen as a passive benchmark, its composition changes “substantially over time” as the result of “a substantial amount of discretionary decision making.” In other words, even the construction of a passive index involves active management.

The Study: “The (Mis)Uses of the S&P 500” by Adrian Robertson (of the University of Toronto Faculty of Law). Posted on SSRN in June 2018 and last updated September 2019.

The Process: The author begins by reviewing the details of the methodology used to construct the S&P 500. The author then:

  • Compares the stocks that are included in the S&P 500 to those that are eligible for inclusion based on this methodology.
  • Compares the stocks that are included in the S&P 500 to the 500 largest securities in the CRSP database, and then examines the differences in performance between the two sets of securities.
  • Compares the performance of a theoretical “buy and hold” S&P 500 that never changes its holdings to the actual performance of the index.

The Findings: The author concludes that the S&P Index Committee uses considerable discretion in constructing the index. Notably, on average, there are over 100 securities that qualify for inclusion based on the Committee’s methodology but that are left out of the index.

In addition, the S&P 500 is far from a “buy and hold” portfolio, because changes in composition have a significant effect on performance.

The Implication: Robertson concludes that the S&P 500 is “not ‘neutral’ or ‘universal’ in any meaningful sense.” She notes that investors who buy an S&P 500 index fund are effectively “delegating management” of their portfolios to the S&P Index Committee. In addition, Robertson questions whether, given its discretionary nature, the S&P 500 makes sense as a benchmark for either investment fund or corporate performance.

The “Research Spotlight” series highlights academic papers that examine the value of active investment management and its role in investor portfolios.

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