Reimagining Index Funds

30 Pages Posted: 31 Oct 2023

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Chris Brightman

Research Affiliates, LLC

Xi Liu

Research Affiliates, LLC

Que Nguyen

Research Affiliates, LLC

Date Written: October 3, 2023

Abstract

“Gold-standard” cap-weighted indices have a buy-high and sell-low dynamic that causes a structural long-term performance drag. Of course, relative to itself, no index can underperform, which is the reason it goes unnoticed. If we use a company’s fundamentals to choose stocks—and then cap-weights them – improves the risk-adjusted returns of gold-standard cap-weighted indices. This index, which we call Fundamental-selection Cap-weighted (FS-CW), has outperformed the most popular cap-weighted equity indices around the world over the last 30 years, while reducing risk, and with additional benefits of slightly lower turnover and transaction costs. Live results further support its merits. Building a better index fund that can earn a superior risk-adjusted return versus other cap-weighted indices is not only possible—it is a reality!

Keywords: Cap-weighting, Fundamental Selection, Tracking Error, Outperformance, Indexation

JEL Classification: G11, G12, G14, G23

Suggested Citation

Arnott, Robert D. and Brightman, Chris and Liu, Xi and Nguyen, Que, Reimagining Index Funds (October 3, 2023). Available at SSRN: https://ssrn.com/abstract=4591461 or http://dx.doi.org/10.2139/ssrn.4591461

Robert D. Arnott (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8700 (Phone)
949-325-8901 (Fax)

HOME PAGE: http://www.researchaffiliates.com

Chris Brightman

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.researchaffiliates.com

Xi Liu

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Que Nguyen

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
513
Abstract Views
2,026
Rank
114,343
PlumX Metrics