Passive funds that cap the top holdings?

Malthusian

MK62 wrote: »

The bottom line is that there is no way to know today, whether a market-cap weighted index tracker fund would perform better or worse than an equal weighted version, going forward, over an unknown length of time.

If it's an equal weighted version of an all share index which includes the AIM market or overseas equivalent, I would bet a fiver that it would perform worse than the market-cap weighted version. A couple of years ago I read that the AIM market as a whole had returned something like minus 2% a year since inception in 1995. You'd have a lot of junk dragging performance down.

If we're talking about something like the FTSE 100 or even FTSE 350, you would expect the equal-weighted version to be higher risk and higher reward, other things being equal. Though obviously things are never equal, and in practice it could be a coin flip.

Linton

Looking at the trustnet data the MSCI World Size Factor ETF performed very close to the FTSE World Index from its inception in 2014 (annually less than 1% return difference) until about a year ago when small caps generally fell relative to large caps. Somewhat surprising considering the inflence of the megacaps on the world index.

Thrugelmir

Malthusian wrote: »

A couple of years ago I read that the AIM market as a whole had returned something like minus 2% a year since inception in 1995. You'd have a lot of junk dragging performance down.

With less coverage, less research, fewer market makers. AIM is a classic example of where active management is a necessity. No possibility of leaving it to investors to set an efficient market price. 25% volatility in a share price is not uncommon.

JohnWinder

More grist for the mill (the S&P man):
Now, what we find in the US and Europe is that, typically, an equal-weighted index outperforms its cap-weighted counterpart.

Why do you think that is?

Arguably, there are three reasons that contribute to that. One is that by definition, mathematically, the equal-weighted index would have a lower average capitalisation and typically, other things being equal, there’s a small-cap effect. So equal weight has that going for it — and that’s mathematically certain. The second thing equal-weight has going for it is that it is typically a more value-oriented portfolio, simply because more expensive stocks tend to have higher caps. So equal weight will tend to give you a value bias.. That’s not mathematically certain, but it’s not bad. The third thing that equal weight does is that it automatically rebalances. In the case of the US, say the S&P 500, the index rebalances every quarter. What that means is that every quarter, you sell your winners and buy your losers, and bring everything back to one 500th target weight. And typically that rebalancing is a source of value added as well. So those three things together kind of account for the equal-weight effect.

http://www.evidenceinvestor.com/poor-fund-performance-is-a-global-problem-an-interview-with-craig-lazzara-part-2/
But

JohnWinder

"With less coverage, less research, fewer market makers. AIM is a classic example of where active management is a necessity. No possibility of leaving it to investors to set an efficient market price. 25% volatility in a share price is not uncommon."
Wait a minute. The AIM sector has an index, but is there an index fund available?
If not, everyone investing in that sector/market/exchange whatever it is, is an active investor - so it would be a necessity!
If there is an index fund there are passive investors; the rest are active investors, all sharing the AIM market returns, and on average only getting market returns less costs. So how is it a necessity to have active management unless there's only one active manager and the other active investors are blind dills like me?
That market is 20-odd years old. If there was price discovery to be had, beyond the ability of most other investors, wouldn't other managers have moved into the space by now and created a market as efficient as the others the active managers can't consistently beat?
Is there any evidence that active AIM fund managers outperform the index, because the UK small company fundies underperformed in 74% of cases over the last 10 years according to SPIVA.
Certainly, price volatility will allow a successful active manager to produce a bigger outperformance than is possible in a market where prices show small swings (and the unsuccessful ones will show bigger underperformances). But if we can't leave it to 'investors to set an efficient market price', who else is there in the market - the inside traders?

Thrugelmir

JohnWinder wrote: »

"With less coverage, less research, fewer market makers. AIM is a classic example of where active management is a necessity. No possibility of leaving it to investors to set an efficient market price. 25% volatility in a share price is not uncommon."
Wait a minute. The AIM sector has an index, but is there an index fund available?
If not, everyone investing in that sector/market/exchange whatever it is, is an active investor - so it would be a necessity!
If there is an index fund there are passive investors; the rest are active investors, all sharing the AIM market returns, and on average only getting market returns less costs. So how is it a necessity to have active management unless there's only one active manager and the other active investors are blind dills like me?
That market is 20-odd years old. If there was price discovery to be had, beyond the ability of most other investors, wouldn't other managers have moved into the space by now and created a market as efficient as the others the active managers can't consistently beat?
Is there any evidence that active AIM fund managers outperform the index, because the UK small company fundies underperformed in 74% of cases over the last 10 years according to SPIVA.
Certainly, price volatility will allow a successful active manager to produce a bigger outperformance than is possible in a market where prices show small swings (and the unsuccessful ones will show bigger underperformances). But if we can't leave it to 'investors to set an efficient market price', who else is there in the market - the inside traders?

Have you ever invested/traded in AIM stocks?

Likewise are you a disciple of either John Bogle or "Vanguard" ? While there's much in common between them. Their views in certain areas do differ.

Remember that it takes two parties with differing opinions to create a real market. There's more to investing (as a private investor) than constantly benchmarking against indexes. Timing of purchase and sales makes a huge difference as to the ultimate gain or loss. Numbers on paper have no value. Cash is king.