« From U.S. News: Five Nasty Credit Card Surprises | Main | Question of the Day: Subprime Bailout »
Introducing the Barron’s 400 Index
By JLP | September 1, 2007
This week Barron’s introduced the Barron’s 400 Index. I haven’t spent a lot of time looking at this index but it does sound interesting from a number-crunching standpoint. Their “universe” is the Wilshire 5000 Index. From there, they apply the following methodology to select the stocks for their index:
And, here’s how it has performed when backtested:
Looks pretty good, doesn’t it. There’s just a few problems:
1. This is a backtest and therefore doesn’t really reflect what happens in the real world.
2. Because it is a backtest, we have no clue as to whether or not they data-mined to get these numbers. I’m not saying Barron’s would do such a thing, but you never know.
3. These numbers are for an index, not an actual investment which have investment costs. So, it is almost guaranteed that a mutual fund or exchange-traded fund that followed this methodology would trail these numbers (of course the same can be said for the other indexes in the graphic).
4. Finally, notice how it significantly trailed the other indexes in 2006, which was a good year for stocks. Why?
A couple of things I do like about this particular index:
1. The stocks are equal-weighted, not market cap weighted.
2. Large-Cap, Mid-Cap, Small-Cap, and Micro-Cap stocks are well-represented in this index:
Wow! nearly 40% in Small-Cap stocks! Of course, the skeptic in me wonders if their sizeable inclusion is due to data mining since small-cap stocks have done really well in recent years. Of course, Barron’s does have a methodology for selecting stocks so it’s not like they just loaded up on small companies.
UPDATE: Here’s wherre you can fina a complete list of all 400 companies in the index.
Bottom Line:
I’m going to keep my eye on this one. It looks intriquing and I have a LOT of respect for Barron’s. I wonder how long it will be before this is available as an exchange-traded fund?
Topics: Index Funds, Investing | 6 Comments »
September 2nd, 2007 at 6:06 pm
Yes, the small-cap bias would no doubt boost the backtested returns of this index since 1998.
And questions: How would a fund based on this benchmark be used? Would it be used as a core holding or a diversifier? Would anyone want a core fund with almost 50% in small/micro-caps?
But if the index does not track well against “the market,” the S & P 500), it might serve as a good diversifier.
September 3rd, 2007 at 10:39 am
This looks like bunk to me. It seems like Rupert Murdock is trying to start using the Barron’s brand name.
But this index turns over every 6 months. And the article comes right out and says that they’re trying to get a big bank to buy the (proprietary) algorithm for the index.
I don’t like it. Stick with VEXMX if you want small caps.
September 3rd, 2007 at 12:19 pm
I think this is an interesting idea: take a broader index, and filter out the best. What would worry me is the potential for high turnover within the fund, which could add a lot of unnecessary fees. That is one of the points about investing in index funds – keeping the fees low. Still it is worth keeping an eye on to see how it performs.
September 3rd, 2007 at 6:21 pm
Where do you get list of all 400 companies of Barron’s 400 Index?
September 3rd, 2007 at 9:28 pm
Equal weighting stocks sounds like a bad idea. I’m sure that this fund is going to be MUCH more risky than the S&P 500 so comparing its return is extremely misleading.
September 9th, 2007 at 3:26 pm
Here we are on Sept 9, 2007 and a look at the Barron’s 400 indicates that small & micro equal 24% not 50% as above. I’d certainly like to know the beta by index, sector and caps and the volitility of components in the index.