Asset pre-selection for a cardinality constrained index tracking portfolio with optional enhancement

N. Meade, C. A. Valle and John Beasley

Papers from arXiv.org

Abstract: Index trackers are important passive investments offering the return and risk of the market encapsulated by the index, the largest US index tracker was valued at $900 billion in early 2026. Using a two-stage approach of asset selection followed by estimation on S&P 500 data, we explore the role of cardinality constraints in determining the effectiveness of the tracker's reproduction of market return and risk. We compare eight pre-selection procedures: forward selection or backward elimination; implemented using ordinary least squares or least absolute deviation regression; with or without a regression constant. We show experimentally that out-of-sample tracking errors decrease according to the inverse of the square root of cardinality and out-of-sample tracking error, transaction volume and return-risk ratios all improve as the cardinality constraint is relaxed. By contrast for enhanced returns, cardinalities of the order 10 to 20 are most effective.

Date: 2025-03, Revised 2026-07
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2503.18609 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2503.18609

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().