Ah, so you'd like the passive broad market index which contains the 500 biggest good companies?
Do tell us if you find one I guess.
Do tell us if you find one I guess.
have been profitable under GAAP accounting rules for at least 12 months
have a public float of at least 10% (so that new investors have some governance rights)
have traded for at least 12 months (and won't have sudden changes in public float or shares available due to lockups and recent listing)
And a reminder: not just "good" now, but good over time.
Good companies turn bad (Apple almost went bankrupt), and bad companies can become good (see again Apple; in the UK, recently Rolls-Royce).
* https://en.wikipedia.org/wiki/Rolls-Royce_Holdings
90 in 2022 to about 1100 now:
* https://www.londonstockexchange.com/stock/RR./rolls-royce-ho...
Interesting interview with the CEO, Tufan Erginbilgiç:
In any case, it's been only in the last years that we have had an explosion of a huge variety of funds with low fees, so some of these product strategies need to be retro fitted for a time they did not exist.
But I don't think that's what you were really asking.
And the answer is yes, e.g. both the S&P 500 Value Index and S&P 500 Pure Value Index have beaten the S&P 500 historically.
Small Cap indexes, have also *significantly* outperformed the S&P 500 from 1927 till today (a compounded 13.1% annual growth).
Value stocks represent companies whose price-to-book is particularly attractive compared to the underlying business, and since investing is tied by the sell/buy ratio, buying at a discount improves it. Needless to say, value stocks require more risk, and risk is directly related to potential growth.
Small caps, are both riskier and have a much larger room to grow, they have significantly outperformed the SP500 since 1927.
Neither value nor small caps have done well, in the last decade, as the financial markets have multiple times provided better returns to a small but heavy portion of the market that was neither risky nor at any point had particularly attractive price-to-book ratios.
I gave you numbers and names of indexes that have historically beaten the S&P 500 index in the value category.
All of those have one or more ETFs that replicate that index.
There's an extensive amount of scientific literature talking about the outperformance of value and small caps to the broader market, starting from Nobel price winning Eugene Fama.
2 You need to rebalance to take corporate events into account: new stocks, buybacks, dividends, etc...
500 shares of company A is worth 100% of the market cap of company A.
500 shares of company B is also worth 100% of the market cap of company B.
So if you have 5 shares of each, you'll have 1% of the market cap of each, even if one of those companies finds the cure for cancer or turns out to be a money furnace.
It doesn't eliminate the need for the fund to rebalance, because of companies moving in and out of the index criteria.
But it certainly vastly reduces the need of the fund manager to trade.
(Also, stock buybacks and new share issuance should in principle not change a company's index weight, but in practice they sometimes do.)
With index funds you never have the strong winners to do this with, and so giving is far less tax-efficient.
Or, I can pick up 100 shares of an index ETF for a few thousand and have someone else do all the work for me including rebalancing and doing all the other required calculations (lot tracking and cost basis calculations etc.).
Assuming you're in the US there are several competent brokers that sell fractional shares. Any broker will do lot tracking and cost basis calculatioms for you, they're required to.
Rebalancing might be a pain, yes. I'd bet the drift isn't too bad most of the time, but it's probably effort every time you add or remove money. You'd want to build a tool to tell you how to add and remove to get closer to the index. If you can get the index weights and your holdings in a machine readable format, it would seem pretty tractable, but it would take time to setup; there's a reason funds have expenses, but index fund expenses are small.
I'm 100% invested in funds because it's a lot less work, but if you felt strongly about excluding certain stocks, I think it's pretty doable for say S&P 500. Tracking a total market index, or an international index would be more challenging. Bond indexes are also challenging to track, even for bond funds.
If you don’t pick the right grocery company, you have a shot at picking the right telecommunications company. You pick fewer winners, but you’re also picking fewer losers.
The real reason to do this is because you want to avoid specific companies that are inside the index. You would only do this if you felt confident in your ability to avoid investing a lot of capital in losers. Even if you’re great at avoiding the telecommunications loser, you might be worse than average at avoiding the loser in other sectors.