Index Investing Puzzles

Check out this interesting article titled, "The Weighting Game, and Other Puzzles of Indexing."  Here are the opening two paragraphs.

"If we had hosted a panel discussion about active and passive investing 15 years ago, we would have titled it: "Indexing, Does It Make Sense, and If So, Why?" The burden of proof would have lain at the feet of the indexers. That's not the case anymore. The indexing community has built a compelling case in favor of the strategy, arguing that low costs, tax efficiency, and low turnover increase the odds that passive investments will outperform active vehicles. Investors have responded in droves.

To discuss the growth of passive investing, where it stands today, and whether investors, who now have immediate access to hundreds of different types of indexes, are benefiting, we invited two academics and one practitioner to participate in the Morningstar Conversation. Lubos Pastor and John Heaton are professors of finance at the University of Chicago Booth School of Business. They both helped develop the new CRSP family of indexes, which will debut this year, under the auspices of Chicago Booth's Center for Research in Security Prices. John Montgomery develops quantitative models to manage mutual funds for Bridgeway Capital Management, a firm he founded in 1993."

The issue of rebalancing or reconstituting comes up for discussion.  I don't see this as a problem for us as investors, at least in the U.S. market.  If one holds ETFs in all nine asset classes (The Big Nine) then stocks that migrate from SCV to MCV still stay in our portfolios as we hold both VBR and VOE.  We may lose or gain a slight amount as we will not hold identical percentages in each asset class, but that is minor.

The article is a tad long, but interesting for some readers.