Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Apples to indexes still favors indexes

Posted by: Aaron Pressman on June 16, 2006

Barry Ritholtz, who I genuinely admired and liked when I worked at, has an anti-indexing post up that just cries out to be debated. He’s citing some Vanguard data that WSJ investing columnist Jonathan Clements wrote about back in May. If you compare all US stock funds to the S&P 500, a majority have beaten the index individually for each of the past four years and for six out of the past seven. Barry says:

“But its pretty surprising that something everyone takes for granted — active managers underperform the S&P500 — turned out to be less true than many people probably assumed.”

Well, not exactly. In fact, not at all. The Vanguard data this is all based on lumps in all manner of funds, large cap, small cap, mid cap, whatever. That’s not an appropriate comparison. S&P does a report every quarter that breaks down funds into categories and compares them to relevent indexes. It also compares all funds to the broadest S&P index, the S&P Supercomposite 1500.

At the top, for the six years from 2000 through 2005, a majority of funds individually beat the 1500 Index three times. But over the past three years cumulatively, 51% trailed the index and over the past five years 62% trailed.

When you start to look at sub-categories, it’s even worse for actively managed funds. Almost 56% of large cap funds beat the S&P 500 last year but 62% trailed the index over three years and 65% over the past five. For mid-cap funds, 70% to 80% trailed the S&P Midcap 400 Index over the past one, three and five years. For small caps, where active managers supposedly have the easiest time outperforming because the market is less efficient, 60% trailed the S&P SmallCap 600 last year, 71% trailed over the past three and 72% trailed over the past five. Sounds like indexing still has the upper hand.

Reader Comments

Barry Ritholtz

June 17, 2006 1:57 PM

I am in favor of low cost, low turnover indexing for many investors, and I was surprised at tthe pushback my discussion generated.

A lot of people took that post as an anti-indexing post; It wasn't supposed to be; Rather, it is an "anti-market cap weighted, mindless buy & hold indexing" post.

All one had to do was buy a non-cap weighted S&P500 fund, you dramatically outperformed the SPX.

The key takeaway is not to assume that the what is commonly defined as Indexing (Buying the S&P500 and holding) is a great strategy at all times.

Post a comment



Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

BW Mall - Sponsored Links

Buy a link now!