Recouping the (Remarkably Large) Hidden Costs of Index Fund Management
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.
By watching the recording of this webinar, you are eligible to reward yourself 1 PL credit. You may do so in your CFA Institute Account.
Please note that the presentation and video must not be shared.
