Market cap-weighted indices proved ‘poor choice for investors in 2016’ research shows

Almost 90 per cent of randomly-constructed US equity indices outperformed market cap-weighted indices in 2016.

Research by Cass Business School used Bloomberg data to create one billion equity indices from the 500 largest stocks on the NYSE, Amex and NASDAQ stock exchanges, all with random weightings.

The performance of these indices, without incurring transaction costs through rebalancing, was compared to the equivalent market cap-weighted index over 12 months, with 88 per cent outperforming.

Professor Andrew Clare, one of the report’s authors, says: “These results suggest that the market cap-weighted index would have been a fairly poor index choice for investors over 2016. Also, because there was no rebalancing of these indices throughout the year, the results cannot be attributed to a failure to consider stock turnover and transactions costs.”

The latest research follows research conducted by Cass in 2011, which highlighted how smart beta approaches to investing in US equities saw better returns than market-cap weighted US equity indices.

Clare adds: “The results of the experiment were surprising and were a real challenge to index providers and to both the passive and active fund management industry who, respectively, track market cap weighted-indices, or try to beat them.”