Value Weighted Indexes Have Outperformed the Market

By on May 16, 2011

This week’s Barron’s magazine features an interview with Joel Greenblatt, the author of several investing books. The most interesting takeaway from this interview is Greenblatt’s research into value-weighted indexes.

Greenblatt states an index focused on the cheapest sub-set of equities has outperformed market cap weighted indexes by 6-7 percentage points per year over the past 20 years. This a substantial improvement over equally weighted or fundamental indexes, which have been demonstrated to beat regular index funds by 2-3 percentage points per year. Greenblatt claims the value weighted index has the same beta, or risk, as the S&P 500.

Greenblatt admits he doesn’t know if value weighted indexes will be as successful in the future.

SMA Comment: Since the bull market of the 90’s ended in the year 2000, value stocks have vastly outperformed growth stocks. It may be for this reason that Greenblatt’s value index has shown such good performance.  As Greenblatt honestly admits, it is unknown if the value based index will outperform in the future.  In fact, many companies that used to be considered growth companies have underperformed for so long that they can be lumped in with value stocks (i.e., Johnson & Johnson, Wal-Mart, Procter & Gamble and Pepsico).

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