Gone4Good
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Sep 9, 2005
- Messages
- 5,381
'Cause then you wouldn't have a Legg to stand on.
'Cause then you wouldn't have a Legg to stand on.
That was one thing that always bothered me about indexing. Another was that stocks that go into the S&P500 are handpicked by a committee - AFTER they have already shown themselves to be "hot", and get dropped after they show themselves to no longer be "hot" for a long while.
But the final thing that turned me off to indexes like the S&P500, is the market-cap weighting. You end up with such distortions in terms of diversification.
The much broader indices make more sense to me.
Audrey
Yeah, I still don't like the cap-weighting approach.I agree that those are concerns, but the broader indexes are also cap weighted (I think?). And are those distortions significant? Are the offset by the need to buy so many more stocks - the smaller ones may carry wider spreads?
-ERD50
Yeah, I still don't like the cap-weighting approach.
Yeah, I still don't like the cap-weighting approach.
There are fundamentally weighted indexes now available.
I was under the impression that cap-weighted was the only 'efficient' way to do an index.
Some stock pickers have complained that the stocks they select do not behave as expected because the stocks are in the index. For instance, a bad stock should be going down, but since the index fund holding it is going up, it goes up as well as index managers have to buy it.
There are fundamentally weighted indexes now available.
But here's my thought process on those. If the market actually does a good job of valuing securities, then cap-weighting is the way to go. If, however, it misprices stocks significantly, than a fundamentally weighted index would be better. But if that were the case, active managers should be able to exploit those mispricings better than the simple screens used in fundamentally weighted indexes. But active managers generally underperform cap-weighted indexes. So maybe the market actually does a good job of valuing securities, in which case, we're back to the plain old regular indexes.