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The largest S&P 500 indexers replicate the index with tracking errors of just several basis points per year. Maintaining such small errors requires a nearly exact-replication strategy and precludes profiting from trading much before or after index changes. A strategy of trading at the open following the announcement of a change, rather than at the change, adds 19.2 basis points more return per year with virtually no added risk, but with substantial tracking errors. This additional return is a measure of the delegation cost in monitoring an indexer through tracking errors.
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