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36 Yale J. on Reg. 795 (2019)
Passive in Name Only: Delegated Management and Index Investing

handle is hein.journals/yjor36 and id is 805 raw text is: Passive in Name Only: Delegated Management and Index Investing Adriana Z. Robertsont This Article provides the first detailed empirical analysis of the landscape of U.S. stock market indices. First, I hand collect detailed information about the universe of indices used as benchmarks for U.S. mutual funds. I document substantial heterogeneity across indices andfind that the overwhelming majority of the indices in my sample are used as a primary benchmark by only a single fund. I then turn to passive index funds andfind that both these phenomena are even more extreme among the indices that these funds track. Far from being passive, my findings indicate that index investing is better understood as a form of delegated management, where the delegee is the index creator rather than the fund manager. Finally, I turn to ETFs and find that a substantial fraction of these funds track indices that they or their affiliates create. Even controlling for other factors, Ifind that these funds have, on average, higher expense ratios. My findings shed light on an overlooked part of the financial market and have substantial implications for investor protection. Introduction...................................... ...... 796 I. Indices in Modem Financial Markets ....................... 799 A. Indices as Benchmarks and the Rise ofIndex Investing........ 801 1. Indices as Benchmarks. ................... ..... 801 2. The Rise of Index Investing ............ ........ 802 B. Indices as Managed Portfolios............ ................. 805 C. Benchmarking Against Managed Portfolios ...... ...... 807 D. Index Investing and Delegated Management ...... ..... 808 II. The Landscape of Indices ......................... ...... 810 A. The Sample .................................... 810 t Assistant Professor, University of Toronto Faculty of Law and Rotman School of Management. adriana.robertson@utoronto.ca. I would like to thank Pat Akey, Benjamin Alarie, Anita Anand, Ian Ayres, Oren Bar-Gill, Adam Badawi, Bobby Bartlett, Vincent Buccola, Evelyn Cai, James Choi, Ignacio Cofone, Brendan Costello, Peter Cziraki, Merritt Fox, Andrew Green, Jim Hines, Jeff Gordon, Joshua Mitts, John Morley, Anthony Niblett, Omer Pelled, JJ Prescott, Adam Pritchard, Roberta Romano, Steven Davidoff Solomon, Eric Talley, Andrew Verstein, and Albert Yoon. This Article benefited from comments by workshop participants at Berkeley Law School, Columbia Law School, the University of Michigan Law School, the University of Toronto Faculty of Law, The Wharton School at the University of Pennsylvania, and Yale Law School, as well as participants at the Bernstein Quantitative Finance Conference and the 2018 STILE Law & Economics Workshop. Financial support from the Tory Fund and the Connaught New Researcher Award are gratefully acknowledged. Alvin Yau provided exceptional research assistance. All remaining errors are my own. 795

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