Research done by Aon Hewitt and Cass Business School shows that buying an equity index that is a market capitalization-weighted index may be not be the best approach in investing. What they found is that indices constructed by the capitalization-weighted method underperformed all other methods of constructing indices.
You can construct indices using an equal weight method, or capitalization with a cap or base an index on low volatility. Another study constructed indices using total dividends paid by a company; each company's total annual cash flow; each company's book value; each company's total annual sales and also according to a combination of these.
In these studies, the indices constructed by capitalization method, which is the common method, underperformed all other methods. The point is that you might want to consider this information if you are buying an ETF.
You can find information on these papers on Cass Business School's site together with the papers. What may be more interesting is a 5 minute video on this subject.
On my other blog I am today writing about Valener Inc. (TSX-VNR, OTC-VNRCF)...continue...
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When benchmarking your portfolio returns do you use price return or total return (includes divs) ? Takes hard work searching for the total return data. Thanks SMc
ReplyDeleteI am currently living off my investments. Generally I track using S&P TSX comp Index. There is a total return for S&P TSX Comp but it assumes reinvestment of income and is here .
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