At The Money Fan Favorite: Looking Past Market Cap Weighted Indexes
Summary
Bloomberg’s Barry Ritholtz interviews Rob Arnott, founder of Research Affiliates, to critique market-cap weighted indexes like the S&P 500. Arnott argues that cap weighting forces investors to buy high and sell low, citing hidden costs from index rebalancing and the "flip-flop" problem. He advocates for fundamental indexing, which weights stocks by economic metrics like sales and profits, offering a value tilt that has historically outperformed cap-weighted value indexes with lower volatility.
Topics discussed
Introduction: Risks of market cap-weighted indexes
The 'Active Side' of Indexing and thought experiments
Hidden costs of index additions and deletions
The 'Flip-Flop' problem and performance drag
Defining Fundamental Economic Weighting
Fundamental Index vs. Cap-Weighted Value Performance
Equal Weighting vs. Fundamental Indexing
Navigating Mega-Cap dominance and Value cycles
Rebalancing Alpha and final recommendations
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