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Myths and Misconceptions About Indexing
| Content Provider | Semantic Scholar |
|---|---|
| Abstract | Since first being introduced in the early 1970s, indexing has become an important investment strategy for institutional and individual investors, and indexed assets have grown substantially, totaling $340. 1 billion, or 5.6% of all mutual fund assets, as of December 31, 2002. However, indexing has also been continually criticized. These criticisms have given rise to a number of misconceptions, which persist despite research disproving them and despite the historical performance of index mutual funds. Several current misconceptions about indexing include: Myth 1: All index mutual funds are managed equally. Successfully tracking a benchmark index requires skill and experience. Variations in index fund managers' skills and abilities are evident in the significant performance differences among funds tracking the same index. Myth 2: Indexing is a self-fulfilling prophecy. This theory posits that the growing popularity of index funds in the 1990s caused cash to flow into the stocks in the funds' target indexes, boosting the performances of passively managed funds versus those of actively managed funds. Yet evidence and intuition show that the success of indexing in the 1990s, specifically with respect to funds tracking the Standard & Poor's 500 Index, is attributable to factors other than the rising popularity of index funds. Myth 3: Indexing cash flows move markets. A common misconception is that cash flows into or out of index funds influence the prices of securities heavily and can contribute to booms or crashes in the markets. However, a review of index funds' cash flows shows a lack of correlation with market performance. Myth 4: Index funds always underperform in a bear market. Some critics contend that index funds are sure to underperform actively managed portfolios in bear markets because index funds remain fully invested, while active managers have the leeway to hold cash as a defensive measure. In reality, the performances of most actively managed funds show that these funds did not produce superior results during bear markets. Myth 5: Equity index funds are tax-inefficient in a bear market. Some fear that investors might increase their redemptions during a bear market, which would force index mutual funds to sell securities and realize large capital gains. However, a review of redemption activity and capital gains distributions during the Executive Summary ® |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://www.vanguard.com/pdf/indexmyths.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
