Indexes do not do well with finding the X factor

In the world of investments, it seems that one of the big motivations of investors – both professionals and small individuals – is to try to get more than what the general market could offer them. With the hunt for this Holy Grail, it often happens that it happens. This does not necessarily mean that such attempts to beat the market would not be very actively practiced anyway. Also, Wall Street has gradually honed the practice of feeding the idea of ​​beating the market, which is often accompanied by more active trading by investors, which in turn means higher commissions for these intermediaries.

It seems that there is an age-old promise that someone can choose the winning stocks for you more successfully, of course, for a certain fee. Accordingly, active fund managers do this. However, recent years have brought a boom in the passive exchange-traded fund (ETF) industry. This does not mean that this market-following strategy cannot be combined with very active choices (both about the right trading moment and the right stocks). In other words, new indexes are created for chupas, which promise to find some factor or focus on some topic, which would then allow investors to beat what the overall market could offer them.

It must be said that in reality, finding such a market-beating X-factor is actually quite difficult for such ETFs. What’s more, it’s often the case that the managers of such ETFs charge more for this higher potential reward, regardless of whether it’s ever delivered to the investor.

Now also the researchers of universities in the USA The Wall Street Journal have come to the conclusion that they can’t really find evidence that such exchange-traded funds, which aim to isolate some stock factor, set or feature that purportedly generate higher risk-adjusted returns, would have outperformed over the previous 10 years if compared to what a simple US common stock market would have returned investors Standard & Poor’s 500 index holding.

In summary, the premise of isolating a certain investment trait with the help of indices to outperform the market may undeniably seem like a good idea, even though the data suggests otherwise.