CHASING PERFORMANCE

Because normal, capitalization-weighted indexes are overperforming, they are becoming more popular than smart beta ETFs. The performance of capitalization-weighted indexes is typically determined by the biggest companies. For example, despite Vanguard Total Stock Market Index Fund ETF following 3600 companies, the biggest 25 make up 27 percent of its value.

Financial products change but human behaviour does not. Everyone chases indexes that show good performance, yet we do know that there is no such strategy that always overperforms.

As a response to the above-mentioned phenomenon, the investing guru Larry Swedroe says ‘This is why it is said that investing is simple but not easy. And this is why only a few will become successful without an advisor warning them – even though they know the facts.’

Original date of Hungarian publication: 6 April 2015