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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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  • I've often read how indexes beat active managers. What I don't hear about usually is a comparison on a risk adjusted basis. The S and P 500 funds are quite risky. I don't know how large blend funds compare on a risk adjusted basis.
  • Reply to @golub1:

    I guess that would depend on the index. For instance, I own PKW, an ETF which tracks the Nasdaq Buyback Achievers Index. It not only beats the S + P and the large blend category for 1, 3,and 5 years (it was started in 2007), but does it with less volatility, and a better risk adjusted profile. I consider most non-sector specific ETFs in the same camp as index mutual funds. It is my largest holding in my retirement portfolios.

    Here is the M* link to its ratings and risk:
  • Reply to @slick: Nice fund ! Here is a Mark Hulbert article about the Nasdaq Buyback Achievers Index, and PKW written earlier this year.
  • I've got a question: In what sense is PKW not active stock picking?
  • Reply to @Vert:

    If you are referring to active vs passive management, PKW would be considered passive, since it is based on an index. To become eligible for inclusion in the index, a company must be incorporated in the U.S., trade on a US exchange and must have repurchased at least 5% or more of its outstanding shares for the trailing 12 months. The fund and the index are reconstituted annually in January and rebalanced quarterly in January, April, July and October. In active stock picking, the manager has the ability to buy and sell a stock within the mutual fund at will, or at least within the guidelines set its by stated objective of the fund. Hope this answers your question:)
  • A few years back, I learned here about the good work of author Daniel Solin on the wisdom of index funds and the folly of almost everything else. More recently, someone here mentioned his book, "The Smartest Portfolio You'll Ever Own." (2011). I'm reading it now. The history and data are more powerful evidence for his passionate argument. And he's a fine, no-nonsense writer as well.
  • Reply to @Vert: From Invesco PowerShares Website.

    The PowerShares Buyback Achiever Portfolio (Fund) is based on the NASDAQ Buyback Achievers Index (Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to track the performance of companies that meet the requirements to be classified as BuyBack Achievers™. To become eligible for inclusion in the Index, a company must be incorporated in the U.S., trade on a US exchange and must have repurchased at least 5% or more of its outstanding shares for the trailing 12 months. The Fund and the Index are reconstituted annually in January and rebalanced quarterly in January, April, July and October.

    Effective December 28, 2012, the NADAQ OMX Group, Inc. replaced Mergent, Inc., as the Index Provider of the Index. Effective February 25, 2013, the name of the Index changed from Share Buyback Achievers Index to NASDAQ Buyback Achievers Index. There will be no change to the methodology by which NASDAQ OMX Group, Inc., the Index Provider, calculates the Index. Please see the Fund’s prospectus supplement for more information.

    On February 25, 2013, NASDAQ took the place of the NYSE as the official Index data source.

  • Reply to @Ted:

    Thank you, Ted. I don't understand how passively following criteria that you've actively chosen makes you a passive investor, but then there are a lot of things in this world that I don't understand.
  • edited September 2013
    Reply to @Vert: It's a fair question. Particularly with the proliferation of so many indices in ETF format. The more products are out there, the more they start to seem like active quant funds. But there is a difference.

    All indices are defined by their rules. If an index says it holds the 100 companies from 15 selected Frontier Markets as weighted by dividends paid, and will rebalance annually, then it HAS to hold all 100 of those companies, in that weighting, for that amount of time, until it will run the math and find out what the new 100 are. Repeat and rinse. If an active product says its universe is dividend paying companies from the same 15 markets, that's its universe. It has to choose from those securities, but can hold as many or as few as the manager likes, in whatever proportion they like, for as little or as long as they like. So PKW has to hold, for one quarter, all U.S. stocks that have repurchased 5% or more of their outstanding shares in the past 12 months. At the end of that quarter, it rebalances to reflect the new group that meets that definition.

    If you're wondering what makes that different from a market capitalization weighted index that holds the entire market (or segment of a market) in proportion to the amount of that total market, that's only because that's what people are used to in a passive product. Consider a simple shift, but one that makes an enormous difference in construction: Instead of weighting by market-capitalization, a fund holds every security in a market (segment), weighted equally. If that's a total market fund, then the new index is extremely small cap heavy simply by the greater number of small cap companies. Similarly, if you created an equal weighted total world index, then the representation of foreign securities would skyrocket compared to the approximate 50/50 split the market-cap weighted ACWI or VT currently have.
  • edited September 2013
    Reply to @Vert: In that case, it's hard to say who would qualify as a passive investor. Managers of what are usually thought of as "true" index funds have made an active choice to use market cap as the criterion for the fund's construction. (As Mr. Darcey implies, there's nothing sacred about cap weighting.)
  • "No competent adviser would recommend you put 100 % of your assets in an S&P 500 index. Instead, you should be investing in a globally diversified portfolio of stock and bond index funds with low management fees..." --Daniel Solin.
  • Reply to @AndyJ:

    Well, I apologize if I'm being argumentative over a very small point, but passive investing would seem to be a matter of degree rather than any clear 'active/passive' split. If I understand it correctly, a market cap-weighted index (and the wider the market the better) would be passive because the investor is passively accepting the market returns at the market's pricing. Once you start segmenting the market you're no longer accepting the market's returns, you're taking the returns of the segment that you choose to own. And the smaller the segment you're choosing to own, the less 'passive' you're being in my opinion. A Nasdaq Buyback Achievers' Index seems pretty small compared to VT.

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