Recouping the (Remarkably Large) Hidden Costs of Index Fund Management

Präsentation vom 26. September 2022
Members Only
Rob Arnott
Details

Everyone knows what’s right about indexing, but there are under-appreciated travails that traditional indexers face. What ideas might improve index fund management?

Traditional capitalization-weighted indices generally add stocks with high valuation multiples after persistent outperformance and sell stocks at low valuation multiples after persistent underperformance. For the S&P 500 Index, in the year after a change in the index, additions lose relative to discretionary deletions by about 22%. Simple rules, such as trading ahead of index funds or delaying reconstitution trades by 3 to 12 months, can add up to 23 basis points (bps). This benefit doubles when we cap-weight a portfolio not selected on market value, but based on the fundamental size of a business or its multi-year average market cap.

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