Traditional index funds match market performance and have negligible trading costs with low tracking error—or do they? Not actually—they routinely buy after high price appreciation and sell after high price depreciation. They also have significant trading costs from adding and deleting stocks. We show how index providers can construct better-performing indices that are less prone to performance chasing and have lower turnover.
With sky-high valuations in the US stock market, and what we believe is a tech bubble that has dangerous implications for other areas of the market, we suggest four actions investors can take now to avoid the inevitable bursting of the bubble, and which will likely benefit their portfolios’ long-term performance potential.
A 10-year US Treasury note yielding just little above 2% does feel expensive. Yet we should not be misled by appearances. Our research shows that, contrary to common wisdom, Treasury bonds are only moderately overvalued. All in all, bonds are not as unattractive as a simple historical comparison of their yields may suggest.