What's the strategy
Tenacious
4/26/2011 3:35:26 PM
Ann, any thoughts on why the company selection isn't more rational, ie reflective of the actual economy? Why is such a highly regarded index basically a popularity contest ... most popular company wins?
To me, the S&P is always chasing performance. I'm not sure of their exact criteria, but a lot of it seems to be based on market-cap and size and not on whether it's necessarily a good valuation.
Also, anecdotally, S&P always seems to be top-ticking a trend. For example, lots of dot-coms were added to the S&P in 199/2000 time-frame. The S&P also got extremely overweight the financials in the 2006/2007 timeframe just before the financials collapsed.
Check out this blog. You can see how the S&P weightings change radically over time, depending on "what's hot."
http://bespokeinvest.typepad.com/.a/6a00d8349edae969e2010536cb5772970b-popup
Investing heavily in financials in 2006 would have been a disaster. Likewise being super-heavy in tech in 1999 (as was the S&P) would have also been a disaster.
Maybe a good strategy would be to use the contrairian weightings of the S&P? (I.e. go heavy on tech when S&P is light on tech and vice-versa). Any data junkies out there who would like to back-test?
Re: More index changes
TelecomFreq
4/26/2011 9:12:17 AM
It is interesting to see how the S&P 500 changes, Though i see the point about inconsistency i am wondering if maybe its a benefit because the index is ever changing, much like the market.
Timely post, Annie. I noticed just yesterday that S&P was making more changes in its indices. SmallCap 600 constituent Catalyst Health Solutions Inc. (NASD: CHSI) from health care services will replace AirTran Holdings Inc. (NYSE: AAI) from industrial/airlines in the S&P MidCap 400 index, and Calamos Asset Management Inc. (NASD: CLMS) from financials/Asset Management & Custody Banks will replace Catalyst Health Solutions in the S&P SmallCap 600 index after the close of trading on May 2. S&P 500
(Southwest Airlines Co (NYSE: LUV), as you know, is acquiring AirTran Holdings in a deal expected to be completed on or about May 2, pending final approvals.)
S&P Comments
tokyogai
4/26/2011 7:53:21 AM
Some of the comments are right on the spot, but getting income from outside the US should not be a problem. American multinationals are one of the bright spots in the US economy. If the governement could figure out a rational way to allow these companies to repatriate overseas earnings, this money would go back into the US economy and benefit the US.
The S&P is not perfect, but it is still a broad refelctive measure of at least the markets. There may be better measures, but this one is widely used and is better than many of the alternatives. That doesn't men it couldn't be made better.
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