Cap-Weighted Indexes Suck
- Joshua M Brown
- December 5th, 2011
...and yes, I know it's "indices" but indexes sounds and reads better and it's my site. And I don't use cap-weighted indexES for anything other than answering people's questions about benchmark performance or short-term trades.
Bloomberg's Statistician-Reporter-Warrior-Poets were set loose on the whole "lost decade for stocks" meme and it turns out that a simple equal-weighted S&P 500 has actually risen by 66% over the last ten years versus the traditionally cap-weighted S&P 500 you know and love (which did nothing).
My man Rob Arnott from Research Affiliates has the money quote:
“It was only a lost decade if you anchored on equities as your core holding and you relied on cap-weighting,” Rob Arnott, chairman and founder of Newport Beach, California-based investment firm Research Affiliates LLC, said in a telephone interview on Nov. 18. About $78 billion is managed using his firm’s investment strategies. “It was a lost decade for most investors, but it didn’t have to be.”
Equal-weighted index products are part of the alternative index family, along with fundamentally-weighted indexes as well as the new "discipline" index ETF products (growth at a reasonable price ETF, large cap contrarian index ETF etc.).
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.