Comments on: The Counter-Intuitivity of Fixed Income Indices

By: Severing The Link Between Price and Weight Part I : WhereDoesAllMyMoneyGo.com

Severing The Link Between Price and Weight Part I : WhereDoesAllMyMoneyGo.com — Tue, 26 Jan 2010 02:57:18 +0000

[...] a recent post about market-cap weighted fixed income indices, it was noted by reader Xenko that one way to overcome overweighting overvalued companies and [...]

By: Canadian Personal Finance Blog » Blog Archive » Random Thoughts: Without Inflating it

Fri, 22 Jan 2010 06:41:33 +0000

[...] does some number crunching of his own in The Counter-Intuitivity of Fixed Income Indices although I am curious about the word Counter-Intuitivity, can I use it in [...]

By: Xenko

Xenko — Wed, 20 Jan 2010 02:29:34 +0000

@Preet: I’d like to see it covered. Can’t wait for future posts. :D

By: Preet

Preet — Wed, 20 Jan 2010 01:39:56 +0000

@Four Pillars – true that was not the original intention of indices, but that is what they are used for NOW! :)

@Xenko – it’s a bit more complicated than that. I’ll explain in the next post…

@Jordan – lol – you’re a sharp cat, they did just launch such an index in the States a few months ago.

@Patrick – there certainly are people who would suggest that it is actively managed, but there are also arguments that it is more transparent of an index than the major cap-weighted indices. Note that many major indices are formed by committee, whereas fundamental indices are screened from all publicly listed stocks measured by FTSE. You might be surprised to know that the formulator of EMH doesn’t believe in it whole-heartedly.

@Xenko – actually, any weighting methodology which severs the link between portfolio weight and price will give the desired result (well, within reason I suppose). Over longer periods of time, it works. Perhaps I’ll start covering this in more detail over the next few weeks.

By: Xenko

Xenko — Tue, 19 Jan 2010 15:15:00 +0000

@Patrick: There wouldn’t be any determining. Just take all the companies in a given index, and then weigh them inversely based on their market caps. Then you would have to test to see if it would give better or worse returns than the standard index. I don’t have access to the data to try and see if the theory would pan out at all, but it would be cool if someone could get all the data necessary to test this.

By: Patrick

Patrick — Tue, 19 Jan 2010 14:05:37 +0000

@Xenko: the trick is determining which is which. I know Preet is into fundamentally-weighted indexing but I for one don't buy it. With all due respect, it's just another form of actively managed fund, and for those to work, they must exploit either persistent market inefficiencies or market fluctuations (ie. market timing). Given the weight of evidence behind the efficient-market hypothesis, I'm still waiting for evidence that either approach works.

By: Jordan

Jordan — Tue, 19 Jan 2010 13:24:32 +0000

Is this the prequel to a Rafi Fundamental Fixed Income Index announcement?

By: Xenko

Xenko — Tue, 19 Jan 2010 05:57:38 +0000

So would it make sense to have an inversely weighted index where you would buy less of the over-valued companies and more of the under-valued companies?

By: Four Pillars

Four Pillars — Tue, 19 Jan 2010 04:11:30 +0000

Hmmm….that sounds logical to me in the sense that an index is a measure of the relative amounts of debt and interest rates of all debts within the index.

I agree this might not be the best risk management strategy but that is not what indexes are for.