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5:00Tracking the S&P 500: Rebalancing, Sampling & Tracking Error
An S&P 500 fund promises to "just hold the index". But the index changes its mind four times a year, pays dividends on its own schedule, and never charges a fee, so matching it perfectly is harder than it looks.
The S&P 500 is a float-adjusted market-capitalisation weighted index: each company's weight is its share price times the number of shares *actually available to trade* (excluding insider and government locked-up stakes), divided by the total. A fund that "tracks" it is trying to hold the same names in the same proportions so its return mirrors the index minus costs. The crucial point is that the index is a *number*, costless and frictionless; a real fund is a *portfolio* that must pay fees, trade in real markets, and hold a little cash. The gap that opens up is the whole story.
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