Web Wealth: Alternative indexes give another perspective on stocks
Do traditional market indexes such as the Standard & Poor's 500 represent the soundest ways to track stocks? Are mutual funds and ETFs that invest in those index stocks the best for you?
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Do traditional market indexes such as the Standard & Poor's 500 represent the soundest ways to track stocks? Are mutual funds and ETFs that invest in those index stocks the best for you?
Maybe not. Many so-called alternative indexes have gained credibility, and investors, in recent years and may offer new options for market participation and growth. Firms have been adding them at a brisk clip. This June post at etftrends.com describes new ETFs (stock-like exchange-traded funds) at S&P Dow Jones Indices, including funds that are geared for investors wanting low market volatility.
Traditional indexes like the S&P 500 give weight to individual stocks based on companies' market capitalizations - the share price times the number of shares outstanding. The higher a company's market cap, the more that stock matters within the index. Despite their staying power, market-cap indexes have gained critics in recent years.
"Monkeys beat market-cap indices," proclaims the title of this 2013 study from the City University of London's Cass Business School, which looked at 40 years of U.S. share data and said the researchers found "that equity indices constructed randomly by 'monkeys' would have produced higher risk-adjusted returns than an equivalent market capitalisation-weighted index over the last 40 years." While the ground isn't necessarily trembling under the feet of the traditionalists, the study strongly suggests that alternative indexes deserve a look.
Alternative indexes weight component stocks by any number of criteria. There are equal-weighted indexes such as the S&P EWI Consumer Staples, dividend-weighted indexes like the FTSE All-World High Dividend Yield Index, and social-responsibility indexes such as the Dow Jones Sustainability World Index Ex Tobacco, Alcohol & Gambling.
What about those "tobacco, alcohol, and gambling" stocks? Find them in their own indexes - known as sin indexes or vice indexes, such as Standard & Poor's Casinos and Gaming index, or the ISE SINdex. The latter is an equal-weighted 30-stock index that includes horse racing (Churchill Downs Inc.), casinos (Wynn Resorts Ltd.), big tobacco (Lorillard Inc.), big booze (Anheuser-Busch InBev N.V.), and many others. The ISE SINdex grew about twice as fast as the S&P 500 after its recession lows. See a bar chart for the index - ticker $SIN - here:
Funds that invest in sin stocks include the focused Ladenburg Thalmann Gaming and Casino fund, and the more thoroughly evil-going Vice Fund, or VICEX, which is invested in a full range of tomfoolery - gambling, booze, tobacco, and guns (well, defense stocks). Here is a 2012 Forbes interview with Gerry Sullivan, who heads the Vice Fund.