The article by Peter Molk and Adriana Z. Robertson challenges the widely held belief that index funds, particularly those tracking the S&P 500, are required to strictly follow their underlying index holdings. The authors argue that these funds have significant discretion in their investment choices, which is often overlooked. They find that S&P 500 index funds do not typically commit to holding a representative sample of the index's components or replicating its returns. Instead, managers have legal flexibility to deviate from the index's holdings, and these deviations are common. Even among the largest S&P 500 funds, holdings differ from the index by 1.7% to 7.5% in the fourth quarter of 2022, amounting to nearly $61.5 billion in discretionary investment decisions. The authors also find no significant relationship between these deviations and investment flows, suggesting that investors do not respond to them. This finding complicates the narrative around index funds and weakens criticisms of their corporate governance and market efficiency. The article concludes by discussing the implications for corporate governance, investor protection, and universal ownership, highlighting the nuanced nature of modern investing.The article by Peter Molk and Adriana Z. Robertson challenges the widely held belief that index funds, particularly those tracking the S&P 500, are required to strictly follow their underlying index holdings. The authors argue that these funds have significant discretion in their investment choices, which is often overlooked. They find that S&P 500 index funds do not typically commit to holding a representative sample of the index's components or replicating its returns. Instead, managers have legal flexibility to deviate from the index's holdings, and these deviations are common. Even among the largest S&P 500 funds, holdings differ from the index by 1.7% to 7.5% in the fourth quarter of 2022, amounting to nearly $61.5 billion in discretionary investment decisions. The authors also find no significant relationship between these deviations and investment flows, suggesting that investors do not respond to them. This finding complicates the narrative around index funds and weakens criticisms of their corporate governance and market efficiency. The article concludes by discussing the implications for corporate governance, investor protection, and universal ownership, highlighting the nuanced nature of modern investing.