Mon 19 Jun 2006
Hey, just one thing about that index fund you own…
Posted by Quicksilver under Books , Tactics[3] Comments
How Index Investing Harms Your Portfolio
I read about this a few months ago in the book Just One Thing?where Rob Arnott contributed a chapter and it really stuck out as a useful piece of info.
Now for the other point of view and more supporting arguments with charts.
June 20th, 2006 at 2:52 am
I am not surprised there is finally some commentary about the Arnott chapter in the Just One Thing book… In my opinion, equal weighting is silly, and I think Arnott agrees with me (or I agree with Arnott… depends on your perspective).
Arnott has more recently suggested using fundamentally weighted indexes (I do not have a link to the original Arnott article, I have to use a recent John Mauldin re-quoting of him):
http://www.2000wave.com/article.asp?id=mwo061606
Is fundamental weighting the answer? If you can keep expenses well below the 2% of increased return (according to the Arnott research), it might work.
I think it is a step forward from pure index investing, but I am sure we will find something better sooner or later…
June 20th, 2006 at 7:40 pm
Yes, I remember reading about fundamentally weighted indexes also but Arnott did support equal weighting as a start to improve on market cap plus it’s an “easy” approach. But the point was that some change should be made to the status quo and what change was open to debate.
June 24th, 2006 at 1:56 pm
EWI have 2 major practical hurdles:
1) greater spread on the companies in the lower half of the S&P 500 market cap;
2) difficulty with greater shifting on and off the list at the lower end of the S&P 500, generating more trading activity and less efficiency.
Just because large caps have lagged over the past 3 years as small/mid caps have surged doesn’t mean that this trend will continue. While I can see the logic behind the EWI, I think this is a paper-traded index that won’t perform nearly as well in real-world scenarios.
I’ll be watching the ETF and potentially split my next S&P500 index purchase half with the EWI ETF, and half with the traditionally market-cap weighted index. Then I’ll be able to see how they perform over time with real money.