Is there a risk of abuse in ETFs?
As far as I understand, the issuer of an ETF following S&P 500 should hold shares of the 500 companies included in that index. So, when company A goes out of the index and company B goes into it, the ETF issuer should sell all shares of A and buy shares of B instead.
Suppose an investor knows that such a change is going to happen. He can take advantage of this knowledge by bidding to buy many shares of A in a low price and to sell many shares of B in a high price. Since the ETF issuer is obliged by regulations to sell A and buy B, it might have to accept the investor's unfair prices.
Is this scenario possible, and if not, what is done to protect against it?
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Everybody else also knows about the change in the index. It doesn't just impact ETFs but also all the index funds. Many funds will spread the transactions out. Many times there is a gap of weeks between the announcement and the change.
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