I did mean higher than, but that is because I incorrectly included the overhead of front running in the expense ratio when I think it would actually manifest as a failure to track the index. Some total market funds end up being a hair pricier (VTSAX and VFIAX are both .05% right now).
Still, if you look at VFIAX it tracks the index perfectly despite front running so it is still nothing to worry about. The amount of money in index funds is large so there is room for a few people to make some money without a big impact. There is some deviation that is significant around the 35 year mark, but do we even know that front running is the cause?
My understanding is that in practical terms weighting shouldn't matter for indexes for the most part since you should only have to buy/sell when funds enter/leave the index (that is the bug). The weight should track without any active trading because it's based on market cap. You buy it and if the market cap increases so does the holding and if it decreases so does the holding. No need for trading.
Now if you want equal weighting among the 500. Well that is an issue. It's one reason not to buy an equal weighted fund.
I know people are thinking of other more problematic indexes than the S&P 500. I don't because I don't buy them so I haven't given a lot of thought to what front running means to them. My investment objective is to hold the entire investable space weighted by market cap (modulo currency risk and home bias) and most indexes play no part of that.
>>I think it would actually manifest as a failure to track the index
No, because the stock was added to the index on the same day. So the fund is tracking the index, and the index is doing what it said it would do. It's just that they're both buying in an inefficient way that costs more than it might, and others capitalize on that inefficiency.
Still, if you look at VFIAX it tracks the index perfectly despite front running so it is still nothing to worry about. The amount of money in index funds is large so there is room for a few people to make some money without a big impact. There is some deviation that is significant around the 35 year mark, but do we even know that front running is the cause?
My understanding is that in practical terms weighting shouldn't matter for indexes for the most part since you should only have to buy/sell when funds enter/leave the index (that is the bug). The weight should track without any active trading because it's based on market cap. You buy it and if the market cap increases so does the holding and if it decreases so does the holding. No need for trading.
Now if you want equal weighting among the 500. Well that is an issue. It's one reason not to buy an equal weighted fund.
I know people are thinking of other more problematic indexes than the S&P 500. I don't because I don't buy them so I haven't given a lot of thought to what front running means to them. My investment objective is to hold the entire investable space weighted by market cap (modulo currency risk and home bias) and most indexes play no part of that.