The Cons of Market Cap-Weighting

An article in Morningstar discusses the downside of using market-cap-weighted indexes, noting that within certain markets or strategies this approach can “compromise diversification and intended factor exposure.” “The assumption that market participants act rationally isn’t necessarily true,” the article argues, adding that history shows how euphoria can lead to a stock price becoming heated and deviating “wildly from its true underlying value.”  Owning a cap-weighted index, it argues, “could result in overweighting those stocks that… Read More

There is Never a Good Time For Active Management – But Now Might Be One

By Jack Forehand (@practicalquant) —  When active managers are struggling relative to their benchmarks, you will often hear the same description of the problem. They will talk about how the current period has been a rough one for active management, but things are about to change and we are moving toward a “stock pickers market” where the criteria they use to select stocks will begin working again. They will argue that active management will rise again… Read More

The S&P 500: Read the Fine Print

If you’re making an argument for passive investing, you’d probably point out that it’s less expensive, it’s tax efficient, and has paid off over long periods of time. In a recent Bloomberg article, columnist Nir Kaissar describes the S&P 500 (the first index fund) as the “poster child” for passive investing, having returned 11.6% annually over the last 5 years (from June 2011 to May 2016) versus the 10.5% return of the S&P 500 Value… Read More