Investing in Total Markets

[wabmester]

BRLIX!

There is an equal-weighted S&P 500 ETF: RSP.

I just googled a Scott Burns article about this subject.    Excerpt:

The limitation of an equal-weighted index fund, Mr. Arnott points out, is that it's a lot more difficult to buy or sell the smallest stock in the index than the largest stock. Basically, it's difficult to scale-up an equal-weighted index fund. In addition, transaction costs are likely to be much larger.

Mr. Arnott proposes what he calls "fundamental" or "Main Street" indexation. Rather than sorting stocks by market capitalization -- a favorite Wall Street measure -- he proposes building portfolios based on fundamental measures: book value, trailing five-year average operating income, trailing five-year average revenue, trailing five-year average sales, trailing five-year average gross dividend or total employment. In addition, he constructed a composite portfolio combining several of these measures.

The result?

Over the 42-year period from 1962 to 2003, the S&P 500 index returned 10.52 percent annually. A capitalization-weighted index of 1,000 stocks returned slightly less, 10.30 percent. But the Main Street-indexed portfolios returned an average of 12.43 percent. Main Street indexing, in other words, beat capitalization-weighted indexing of the same stocks by an average of 2.13 percent annually while beating the S&P 500 index by 1.91 percent annually.

What causes the difference?

Mr. Arnott believes that capitalization-weighted indexes systematically overexpose stocks that are overvalued while underexposing stocks that are undervalued. An equal-weighted index, like the Rydex ETF mentioned earlier, overcomes this systematic performance drag by eliminating capitalization weighting. Using any of the Main Street index-building tools, however, overcomes the systematic performance drag while allowing the construction of more liquid portfolios.


Article

 

[lazyday]

Until I see some good analysis or data, I don't trust Rydex to have low internal transaction costs. Bid/ask spread, market impact, and commissions including soft dollars which they pay, according to Swensen.
Also, there's a 12b1 fee which isn't active now, but could kick in.

Bridgeway is willing to have some tracking error in order to minimize internal costs with BRLIX, and since it's only megacap, the stocks are extremely liquid with low spreads. The ER is also only .15%. And, today I think megacaps are relatively cheap.

We've debated Rydex, Powershares, and RAFI some over at Raddr's board, over the last several months. I've been one of the skeptics.
Though I do like the concepts of fundamental, and to a lesser extent, equal, weighting. If executed well, and with low ER.

 

[cute fuzzy bunny]

You can also go the cheap and dirty route I use.

Target retirement 2045 in the taxable (much of which is TSM), with a huge chunk of large cap value (windsor II) in the taxable

TSM and a large chunk of small cap value in the IRA. Dividends from the TSM in this acct are reinvested in the small cap value.

The benefits of indexed broad markets, with a value tilt.