Among the arguments in favour of fundamental indexing, the most suspect is the following claim:
John Bogle’s (creator of the Vanguard mutual fund behemoth) back-testing research several decades ago that showed that most investors would be better off in funds that simply mirrored the then best market indices available, but at the lowest cost. However, times move on, research advances and other indices are created and tracked.
Bogle’s argument of the superiority of traditional indices is not just based on back testing; it is also supported by logic. Investors as a group earn returns that match the market’s less expenses. But, the new wave of “fundamental” indices is not supported by logic. It is based on mining the market data for a set of factors that would beat the market if the future looks anything like the past. John Bogle and Burton Malkiel defended traditional indexing in a op-ed piece in The Wall Street Journal:
We concede that there is some evidence, based on numbers compiled by Ibbotson Associates, that long-run excess returns have been earned from dividend-paying, “value” and small-cap stocks — albeit returns that are overstated by not taking into account management fees, operating expenses, turnover costs and taxes. But to the extent that investors are persuaded by these data, the premiums offered by such stocks may well now have been “arbitraged away” in the stock market, as price-earnings multiples have become extremely compressed.
Do you think it would pay to bet against Bogle and with the big names in the corner of fundamental indexing?
