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True or False: "Whole market index funds should be treated as growth funds in a portfolio...
This is basically the way I play index funds in my own portfolio, was interested in tapping into this boards' collective human capital for points/counterpoints, and debate.
Dear Shostakovich: A Total Market Index Fund is considered to be a large-cap blend which combines both value and growth stocks in the portfolio and are not necessarily momentum driven. Regards, Ted
Hi Shostakovich- While Ted is correct regarding the theoretical description of a "Total Market Index Fund" my own observation suggests that in the stock market as it has existed since 2009 the entire market appears to be "momentum driven", as the value and growth sectors all move simultaneously, and frequently without any particular reference to fundamentals. The crowd just seems to surge one way or another, depending on the color of the mood ring. Not so for bonds, though... still some discrimination there as far as different sectors moving separately according to economic specifics.
I guess my response would be kinda-sorta, but not exactly. The indexes have a slight bias toward momentum and "not-value" because cap-weighting cheats a little toward stocks with higher prices relative to the market as a whole. So, I guess you could put some part of the cap-size effect in the "momentum" column. But since the indexes aren't reconstituted constantly, it's not what I would think of as momentum in the usual sense, which I think implies a shorter time frame.
The kinda-sorta in my own port comes from the fact that the indexes are more volatile than the funds I hold in each space (e.g., PRBLX and BBTEX in U.S. large, ARIVX in U.S. small, ARTKX in foreign-EAFE-ish). Against those funds, the relevant indexes in general run a little hotter in both up- and down-markets, so for me they're positive momentum funds in the sense of reflecting the market's momentum in an up-market a bit more than the ~ B&H funds in the port, so I'd rather have relatively more in indexes then, and relatively less in a down-market.
Not eloquently stated, but that's about as good as it gets for me on Saturday morning ...
My answer is very likely to disappoint you: It depends.
It depends if you want to invest using a broader telescopic perspective or a more focused microscopic perspective. I believe the more intense microscopic approach is warranted.
Using a loose interpretation of market returns, a fairly high and positive correlation exists between any broad market equity Index, and more refined subsets of that data set, like the S&P 500, the S&P 400, the Russell 2000, and even the finer granularity of growth and value components of these subsets. A rough telescopic viewpoint could assess these returns as fairly equal. Using a finer grid, they are not so.
Since the early 1990s, researchers like Fama and French, and a host of others, have demonstrated that market returns are dependent on at least several other factors such as size, book-to-market evaluation, and momentum. BARRA uses a plethora of additional factors for separate corporations.
The historical returns data supports this position, and correlation coefficients between various market Indices change over time, and are almost never exactly a perfect correlation value of Plus One.
I’m sure you are familiar with the numerous forms of investment Periodic Tables that are published annually. Here is a Link to the famous Callan version that shows the variability in returns for a number of representative Indices:
Keep in mind that there are Indices, and there are even more Indices. The various Indices are constructed differently, and do produce some classification disparities.
Initially, the Indices were one-dimensional, dependent upon a single parameter (like book to capitalization ratio) for bifurcation. As the Indices industry matured, the classification criteria became multidimensional.
Morningstar and S&P each do the classification process differently. To illustrate, S&P uses multiple criteria when segregating its corporate universe.
The S&P multifactor modeling incorporates the following components: For value measures, dividend yield, sales-to-price ratio, cashflow-to-price ratio and book-price ratio. For growth measures, 5-year EPS growth rate, 5-year sales-per-share growth rate, and 5-year internal growth rate (whatever that means). Using a composite score methodology, S&P rates one-third of its population value oriented and one-third growth oriented.
So your question is both more subtle and more complex than it might seem on the surface. I build my portfolio using the more granular approach. If another investor chooses to hold only three components (US total market, bond market, and International market), that's okay too. Our portfolios need only be complex enough to satisfy our goals and comfort level. Complexity anxiety need not be a part of the grand overarching plan.
I apologize for my answer that undoubtedly contributes to any existing confusion.
Comments
Regards,
Ted
Regards- OJ
I guess my response would be kinda-sorta, but not exactly. The indexes have a slight bias toward momentum and "not-value" because cap-weighting cheats a little toward stocks with higher prices relative to the market as a whole. So, I guess you could put some part of the cap-size effect in the "momentum" column. But since the indexes aren't reconstituted constantly, it's not what I would think of as momentum in the usual sense, which I think implies a shorter time frame.
The kinda-sorta in my own port comes from the fact that the indexes are more volatile than the funds I hold in each space (e.g., PRBLX and BBTEX in U.S. large, ARIVX in U.S. small, ARTKX in foreign-EAFE-ish). Against those funds, the relevant indexes in general run a little hotter in both up- and down-markets, so for me they're positive momentum funds in the sense of reflecting the market's momentum in an up-market a bit more than the ~ B&H funds in the port, so I'd rather have relatively more in indexes then, and relatively less in a down-market.
Not eloquently stated, but that's about as good as it gets for me on Saturday morning ...
My answer is very likely to disappoint you: It depends.
It depends if you want to invest using a broader telescopic perspective or a more focused microscopic perspective. I believe the more intense microscopic approach is warranted.
Using a loose interpretation of market returns, a fairly high and positive correlation exists between any broad market equity Index, and more refined subsets of that data set, like the S&P 500, the S&P 400, the Russell 2000, and even the finer granularity of growth and value components of these subsets. A rough telescopic viewpoint could assess these returns as fairly equal. Using a finer grid, they are not so.
Since the early 1990s, researchers like Fama and French, and a host of others, have demonstrated that market returns are dependent on at least several other factors such as size, book-to-market evaluation, and momentum. BARRA uses a plethora of additional factors for separate corporations.
The historical returns data supports this position, and correlation coefficients between various market Indices change over time, and are almost never exactly a perfect correlation value of Plus One.
I’m sure you are familiar with the numerous forms of investment Periodic Tables that are published annually. Here is a Link to the famous Callan version that shows the variability in returns for a number of representative Indices:
http://www.callan.com/research/download/?file=periodic/free/548.pdf
Keep in mind that there are Indices, and there are even more Indices. The various Indices are constructed differently, and do produce some classification disparities.
Initially, the Indices were one-dimensional, dependent upon a single parameter (like book to capitalization ratio) for bifurcation. As the Indices industry matured, the classification criteria became multidimensional.
Morningstar and S&P each do the classification process differently. To illustrate, S&P uses multiple criteria when segregating its corporate universe.
The S&P multifactor modeling incorporates the following components: For value measures, dividend yield, sales-to-price ratio, cashflow-to-price ratio and book-price ratio. For growth measures, 5-year EPS growth rate, 5-year sales-per-share growth rate, and 5-year internal growth rate (whatever that means). Using a composite score methodology, S&P rates one-third of its population value oriented and one-third growth oriented.
So your question is both more subtle and more complex than it might seem on the surface. I build my portfolio using the more granular approach. If another investor chooses to hold only three components (US total market, bond market, and International market), that's okay too. Our portfolios need only be complex enough to satisfy our goals and comfort level. Complexity anxiety need not be a part of the grand overarching plan.
I apologize for my answer that undoubtedly contributes to any existing confusion.
Best Wishes.