The traditional financial theory attributes security returns to market- or factor-based risk, with no role ascribed to other influences. In this research, the authors argue for including investor demand as an additional variable in explaining returns. Can changes in investor demand generate systematic changes in security returns?
This study explores the degree to which fund concentration (high tracking error) affects the magnitude of excess returns and whether or not the likelihood of outperformance or underperformance are distributed similarly.
Pastor, Stambaugh, and Taylor (2015) and Zhu (2018) provide significant evidence of decreasing returns to scale (DRS) at both the fund and industry levels. The authors examine the robustness of their inferences after Adams, Hayunga, and Mansi (2021) critique the above two studies.
This time is almost always different, it seems, but the data suggest that things are typically always the same: chaotic and volatile. Stock market investors should be prepared for large short-term moves in stocks and they should be skeptical of narratives suggesting a causal relationship between environmental variables and future volatility.
We estimate that passive investors held at least 37.8% of the US stock market in 2020. This estimate is based on the closing volumes of index additions and deletions on reconstitution days. 37.8% is more than double the widely accepted previous value of 15%, which represents the combined holdings of all index funds. What’s more, 37.8% is a lower bound. The true passive-ownership share for the US stock market must be higher. This result suggests that index membership is the single most important consideration when modeling investors’ portfolio choice. In addition, existing models studying the rise of passive investing give no hint that prior estimates for the passive-ownership share were 50% too small. The size of this oversight restricts how useful these models can be for policymakers.
The analysis above suggests that portfolios that include or exclude emerging allocations are roughly the same. For some readers, this may be a surprise, but for many readers, this may not be "news." That said, even if the data don't strictly justify an Emerging allocation, the first principle of "stay diversified" might be enough to make an allocation.
Of course, the assumptions always matter.
Market commentators sometimes suggest that the equity ETF market is just a bunch of "index funds" that all do essentially the same thing: deliver undifferentiated stock market exposure.
How true is that statement? Fortunately, we can test the hypothesis that the ETF market is roughly a few thousand different ways to capture the same basic risk/returns. To do so, we leverage our Portfolio Architect tool to quantify the active share of all US equity ETFs against the S&P 500 index (the king of indexes).
The Persistence of Fee Dispersion among Mutual Funds Cooper, Halling and YangReview of Finance, 2021A version of this paper can be found hereWant to read our [...]
Sorry for the clickbait, but Hoover Institute fellow and “Grumpy Economist" John Cochrane's answers to the seemingly benign question, "How should long-term investors form portfolios," [...]
In this article we discuss the research concerning the question of whether or not investors can beat active mutual funds with cheap ETFs. Are Passive [...]
Mutual fund investments in private firms Sungjoung Kwon, Michelle Lowry, Yiming QianJournal of Financial EconomicsA version of this paper can be found hereWant to read our [...]
Historical Returns of the Market Portfolio Ronald Doeswijk, Trevin Lam and Laurens SwinkelsThe Review of Asset Pricing Studies, 2019A version of this paper can be [...]
Institutional Investment Strategy and Manager Choice: A Critique Richard M. EnnisJournal of Portfolio Management A version of this paper can be found hereWant to read our [...]
Can mutual fund stars still pick stocks?: A replication and extension of Kosowski, Timmermann, Wermers, and White (2006) Timothy Riley and Sam WaltonCritical Review of [...]
Campbell Harvey and Yan LiuJournal of Finance, 2020A version of this paper can be found hereWant to read our summaries of academic finance papers? Check out [...]