Passive Investing

AgPa #57: Stocks for the Long-Run – Riskier Than Thought

Stocks for the long run? Evidence from a broad sample of developed markets (2022)
Aizhan Anarkulova, Scott Cederburg, Michael S. O’Doherty
Journal of Financial Economics 143(1), URL/SSRN

Stocks for the Long-Run – this is not only the title of Jeremy Siegel’s popular book but also a well-established idea among investors. If you can wait long enough and don’t need your money on the way, just put it in a diversified index fund and wait. This week’s AGNOSTIC Paper challenges this simple advice and shows that even over very long periods, the chance of losing money with stocks can be higher than previously thought…

  • History offers some scary events of wealth-destruction
  • The US equity market is not necessarily representative
  • Global diversification helps tremendously

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SA #12: VOO – Global Revenues And Global Diversification Are Not The Same

VOO: Global Revenues And Global Diversification Are Not The Same
February 07, 2023

Summary

  • In 2017, about 29% of S&P 500 revenues came from overseas. This fraction increased to about 40% by the end of 2022.
  • Some investors argue that this global exposure is a substitute for true international diversification, i.e., that it is not required to invest in non-US stocks.
  • Global revenues certainly help to stabilize the fundamentals and stock prices of the underlying companies, but they are unlikely to save your portfolio from bets on the wrong country/region.
  • A counterexample from European stock markets shows that true global diversification was much better to escape the region’s underperformance than overweighting European companies with a higher share of global revenues.
  • That said, the Vanguard S&P 500 ETF (VOO) remains an outstanding instrument to track the S&P 500 Index. But despite global revenues of the underlying firms, it remains a bet on US large caps.


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SA #10: ACWI Vs. VT – Vanguard Wins Again

ACWI Vs. VT: Vanguard Wins Again
January 30, 2023

Summary

  • In this article, I focus on the iShares MSCI ACWI ETF (ACWI) and how it compares to the Vanguard Total World Stock ETF (VT).
  • For the longest common period since June 2008, ACWI currently lags VT by about 14%-points or 41 basis points per year.
  • The performance gap mostly comes from different underlying indices. VT tracks an index with >9,400 stocks whereas ACWI ignores small caps and “only” holds about 2,800 positions.
  • ACWI is thus farther away from the academic idea of truly passive investing (holding a market-cap weighted portfolio of all investable stocks).
  • ACWI also comes with higher fees (0.32% TER vs. 0.07% for VT). For investors who seek passive exposure to global stock markets, VT therefore seems the better choice.


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SA #9: VT – As Passive As Practically Possible

VT: As Passive As Practically Possible
January 29, 2023

Summary

  • The Vanguard Total World Stock ETF is one of the leading ETFs to invest truly passively in global stock markets.
  • Passive investing means holding the market portfolio. Applied to equities, this is the market-cap weighted portfolio of all available stocks in the world. By definition, this goes beyond the US.
  • Since 2008, the US market has a tracking error of 6.6% compared to VT. The active share currently stands at 41% which makes a pure-US portfolio a quite active strategy.
  • Historically, active bets on the US were well rewarded. But it’s unclear if this pattern continues. The case for passive investing and global diversification is therefore as strong as ever.
  • VT tracks the FTSE Global All Cap Index and holds 9,473 stocks from 49 countries. With just 0.07% TER, it is thus a very efficient instrument for global passive investors.


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SA #7: ITOT Vs. VTI – Since 2015 Very Similar, But VTI Still Ahead

ITOT Vs. VTI: Since 2015 Very Similar, But VTI Still Ahead
January 13, 2023

Summary

  • The iShares Core S&P Total U.S. Stock Market ETF (ITOT) and Vanguard Total Stock Market ETF (VTI) are among the largest ETFs to invest passively in the US equity market.
  • For the longest common period since 2004, ITOT underperformed VTI by about 20%-points or slightly more than 20 basis points per year.
  • However, just looking at this long-term performance chart is somewhat misleading here. Because of several changes, the two funds tracked 5 different indices over the last 15 years.
  • Starting in December 2015, ITOT switched from the S&P 1500 to the S&P Total Market Index which made the two ETFs mostly comparable. The performance gap to VTI also narrowed.
  • The analysis shows that even passive investors should not only compare ETFs by their historical performance but also pay close attention to the underlying indices, and even more important, index/benchmark changes.


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SA #6: VTI – Truly Passive Investing In The U.S. Market

VTI: Truly Passive Investing In The U.S. Market
January 6, 2023

Summary

  • In this article, I examine how investors can get truly passive exposure to the US equity market.
  • Passive investing emerged from academia and offers benefits through diversification, low fees, and historically better performance than the average active manager.
  • To passively invest in US equities, we need a market cap-weighted portfolio of all investable US stocks.
  • One proxy for that is the CRSP U.S. Total Market Index which currently consists of slightly more than 4,000 stocks – 8 times more than the S&P 500.
  • Historically, VTI followed this index with almost no tracking error and is thus among the best instruments to invest truly passively in US equities.


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SA #5: VOO – One Of The Best S&P 500 ETFs, But Far From Truly Passive

VOO: One Of The Best S&P 500 ETFs, But Far From Truly Passive
January 4, 2023

Summary

  • The S&P 500 Index is probably the most important equity index in the world.
  • For many investors, an ETF that tracks the S&P 500 became synonymous with passive investing.
  • In this article, I will compare the three largest ETFs on the index (SPY, IVV, and VOO) and challenge the passiveness of the S&P 500.
  • Based on historical performance, current expense ratios, scale, and the underlying manager profile, I would personally use the Vanguard S&P 500 ETF to track the index.
  • Within the US, the S&P 500 is a reasonable passive benchmark. From a global perspective, however, it is an active bet on US large caps.


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AgPa #16: Concentrated Stock Markets (7/7)

Mutual Fund Performance at Long Horizons (2022)
Hendrik Bessembinder, Michael J. Cooper, Feng Zhang
SMU Cox School of Business Research Paper No. 22-11 via SSRN, URL

The seventh and final AGNOSTIC Paper on the extreme concentration in stock markets. This one is an out-of-sample test and documents very similar concentration and positive skewness for US mutual funds between 1991 and 2020.

  • Longer investment-horizons lead to extremer return distributions – also for mutual funds
  • Most active managers underperform passive benchmarks – especially over the long-term
  • Compared to the S&P 500, mutual fund investors lost about $1.3T between 1991 and 2020

But a picture is worth a thousand words…


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AgPa #15: Concentrated Stock Markets (6/7)

Extreme Stock Market Performers, Part I: Expect Some Drawdowns (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The sixth of seven AGNOSTIC Papers on the extreme concentration in stock markets. This one shows that even for the top wealth-creators, the road to success has been anything but smooth…

  • Even the best companies during their best decades had substantial drawdowns
  • Today’s drawdowns of tomorrow’s winners are even worse

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AgPa #14: Concentrated Stock Markets (5/7)

Extreme Stock Market Performers, Part IV: Can Observable Characteristics Forecast Outcomes (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The fifth of seven AGNOSTIC Papers on the extreme concentration in stock markets. This one will finally examine how to identify the few big winners ex-ante (at least it will try). Future winners have some distinct fundamental characteristics today. That said, the picture remains noisy and it’s very difficult to find them systematically…

  • Future top-performers tend to be younger, produce higher drawdowns, and spend more on R&D
  • Future wealth-creators tend to be older, more levered, and pay higher dividends
  • Identifying big winners remains challenging

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