parvus wrote:Thus, I'm intrigued by equal-weight and fundamental approaches, providing they can be had relatively cheaply.
On equal-weight approach, presumably you have to draw boundaries. All stocks traded on the TSE? Do you include all stocks traded on Ventures as well? OTC? Market cap weighting solves the problem in practice, because the small companies can effectively be ignored, or sparsely sampled.
But if your index is equal weights, can you sample? If so, on what basis? If it is truly equal weights, is it the chimp's darts board, computerized? Or do you truly have to buy a piece of every company, even the very small ones? And if it is the latter, and a large number of investors opt for equal weights, will a whole bunch of funds be bidding for the same small companies? If so, won't that drive up their share price to stratospheric levels? Or does equal weights work only if a small fraction of investors adopt it?
On fundamental indexes, if many investors opt for the same fundamental index, that will drive up the share price of smaller companies with attractive fundamentals. In effect, you will wind up with a market cap index, albeit with different market capitalizations than now -- market capitalizations that will be the outcome of the fundamental factors chosen by the builders of the index. In effect, you will be running screens, but without the human judgment that is usually used to supplement such screens.
So we better hope that different investors choose funds following different fundamental indexes. But then how do they choose which fundamental index to use? Oh dear, I think we're back to the original problem.
The plural of anecdote is NOT data.