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Indexing:

Indexing:. The Good, The Bad, And the Ugly. Part 1: The Good. U.S. Equity Index Funds as a Percentage of U.S. Equity Mutual Fund Assets. Net Flows to US Index Funds ($ Billions). Net Assets vs. Number of ETFs ($ Billions). The Good:. They’re cheap.

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Indexing:

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  1. Indexing: The Good, The Bad, And the Ugly

  2. Part 1:TheGood

  3. U.S. Equity Index Funds as a Percentage of U.S. Equity Mutual Fund Assets

  4. Net Flows to US Index Funds ($ Billions)

  5. Net Assets vs. Number of ETFs ($ Billions)

  6. The Good: • They’re cheap. • Sometimes, markets actually are efficient.

  7. Active Management’s Dirty Little Secret

  8. Not Just an Equity Phenomenon

  9. Indexed Funds vs. Actively Managed:

  10. Part 2:TheBad

  11. Types of Indexes: • “Plain Vanilla” – Market Cap/Market Cap • Equal Weighted • Fundamentally selected and/or weighted • “Proprietary” – Opaque methodology

  12. Market-Cap Weighting… …works well when… • Large cap outperforms • Growth outperforms • Bubbles form but falters when… • Small cap outperforms • Value outperforms • Bubbles burst

  13. Equal Weighting… …works well when… • Small cap outperforms • Bubbles burst • Sector over-weights outperform but falters when… • Large cap outperforms • Bubbles form • Sector underweights underperform

  14. Fundamental Weighting… …works well when… • Small cap outperforms • Value outperforms • Bubbles burst but falters when… • Large cap outperforms • Growth outperforms • Bubbles form

  15. Proprietary Indexes… Falter when… • Small cap outperforms • Value outperforms • Bubbles burst

  16. Nasdaq 100 in Depth: Restructuring Occurs When: • Any security’s weight surpasses 24% or • The aggregate of positions of more than 4.5% is greater than 48% or (apparently) • Nasdaq feels like it

  17. How the Rebalance (is supposed to) Works: • Weights of all stocks that are > 1% of the index are reduced in tandem until the offense is cleared up • The pool of weight is then redistributed, issue by issue, to those stocks under 1% of the index In other words “we wish we’d made this index equal weighted to begin with.”

  18. How the Rebalance Did Work (4/29/2011):

  19. What’s Wrong with the S&P 500: Why Committees Aren’t Great: • Human discretion instead of Rules based decision making • Present uncertainty around rebalance and inclusions, decreasing market efficiencies • Possible conflicts of interest

  20. Does Type Matter?

  21. Does Type Matter?: Top 5 Holdings

  22. Part3:TheUgly

  23. Core Problems with Commodities Indexes: What’s the Market Cap of Wheat? Which “Oil” Do You Buy?

  24. Four Main Commodities Indexes: DJCI CRB GSCI Rogers

  25. How Do They Stack Up?

  26. Structure Matters

  27. Patching the Holes:Better Natural Gas?

  28. A Note on Performance:

  29. Fixed Income: Who would you rather lend money to: Bill Gates? Or Donald Trump?

  30. Fixed Income – Fundamental Weighting Source: Shane D. Shepherd, “Fundamental Index Fixed-Income Performance: It’s All in the Price,” The Journal of Index Investing, Spring 2011.

  31. Conclusion

  32. Indexing: The Good, the Bad, and the Ugly

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