TSP I-Fund switching index: free lunch opportunity?

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motorcyclesarecool
Posts: 437
Joined: Sun Dec 14, 2014 7:39 am

TSP I-Fund switching index: free lunch opportunity?

Post by motorcyclesarecool » Tue Mar 13, 2018 6:11 am

http://www.fedweek.com/fedweek/tsp-chan ... ve-others/The TSP I-Fund is about to switch to tracking the MCSI All Country World Index (ex US). Presumably this will mean significant inflows over the next year to equities traded in Canada and the BRICs. Is this an opportunity for arbitrage if I were to buy mutual funds / ETFs representing the international stocks outside the EAFE index? My mind just can’t shake the idea that there’s an opportunity here somewhere...
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AlohaJoe
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Re: TSP I-Fund switching index: free lunch opportunity?

Post by AlohaJoe » Tue Mar 13, 2018 6:25 am

motorcyclesarecool wrote:
Tue Mar 13, 2018 6:11 am
http://www.fedweek.com/fedweek/tsp-chan ... ve-others/The TSP I-Fund is about to switch to tracking the MCSI All Country World Index (ex US). Presumably this will mean significant inflows over the next year to equities traded in Canada and the BRICs. Is this an opportunity for arbitrage if I were to buy mutual funds / ETFs representing the international stocks outside the EAFE index? My mind just can’t shake the idea that there’s an opportunity here somewhere...
I think you overestimate how large the TSP-I is and underestimate how large the world is. :D

At the end of 2016, the TSP I fund had $35 billion in assets under management.

The size of the Toronto stock exchange is $2.2 trillion. So if every single penny of the TSP I went into just the Canadian stock exchange it would make up 1/10th of 1%. And that's assuming the fund managers were silly enough to do it in a single trade. The article says it will take them a year or more to make the transition.

This is hardly the first time a fund has changed its index. Back in 2012 Vanguard moved index providers for over $170 billion in funds. One of the bigger changes was that the new index included South Korea which meant that the $67 billion Vanguard emerging markets fund was going to have to buy into South Korea. Vanguard was able to manage that transition just fine; I imagine that whoever is running the TSP these days (BlackRock?) also knows how to run a fund and trade patiently.

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