Here’s Why Index Funds Are Missing Out on Gains | The Informed Investor 61
Index funds and index-tracking products are common building blocks in client portfolios, and the episode focuses on the mechanics of reconstitution rather than just headline returns. It offers a framework advisors can use when comparing index products and explaining tracking and style drift to clients.
Summary
By the etfs deskDimensional's podcast episode examines how index reconstitutions work and what the firm argues they cost investors. The hosts walk through recent changes to Russell indexes, including the small cap Russell 2000 and the Russell 1000 value and growth indexes, and discuss how fixed rebalancing schedules can cause style drift and performance differences between indexes tracking the same segment. The episode also covers overlap between value and growth indexes, advance announcement of index changes, and the example of SpaceX being added to some indexes after its June IPO.
- Indexes generally rebalance on fixed schedules, once, twice or up to four times a year, rather than as stock prices change.
- Rigid schedules can lead to style drift in small cap index funds and to performance differences between indexes tracking the same market segment.
- Because index changes are usually announced in advance, institutional investors often trade the affected holdings before index funds do, which the episode says can hurt fund returns.
- Value and growth indexes can overlap, with some value indexes holding growth stocks and vice versa.
Chapters
From the publisher’s description| Time | Chapter | Length |
|---|---|---|
| Intro | 2 min | |
| Key points about index reconstitution | 1 min | |
| Popularity of index funds | 1 min | |
| Headlines | 1 min | |
| Reconstitution in Russell indexes | 1 min | |
| Changes in Russell 2000 small cap index | 1 min | |
| Changes in Russell 1000 value and growth indexes | 2 min | |
| Overlap in value and growth indexes | 2 min | |
| Stock indexes vs. college football conferences | 1 min | |
| Same category, different index returns | 2 min | |
| Marketing by index providers | 1 min | |
| How indexes handled SpaceX IPO | 3 min | |
| Lessons from 2022 | 1 min | |
| IPOs and index reconstitution | 2 min | |
| Bonds and index reconstitution | 2 min | |
| S&P 500 and reconstitution | 2 min | |
| Front-running index reconstitution | 3 min | |
| Long-term investing vs. competing with market makers | 2 min | |
| Key takeaways | 3 min |
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