Burton Malkiel suggests that “Smart Beta” may be just a fad and that capitalization-weighted indexes “will give the investor the most prudent trade-off between risk and return available.” I wonder how he would respond to the “Japan example.” Japan, at its 1989 peak, made up 60% of the MSCI EAFE index, as shown in the chart below.
Source: ETF.com
The chart above is only updated through 1998. However, the weighting of Japan in the MSCI EAFE is still around 20 percent. Japan’s stock market performance since 1989 has been ugly:
Source: Yahoo! Finance. Returns include dividends, but do not include any transaction costs. Investors cannot invest directly in an index. Jan. 1984 - Mar 2014.
Japan is still 62% below its 1989 peak! Some might take issue with the argument that investing in a capitalization-weighted index like the MSCI EAFE has given you the “most prudent trade-off between risk and return available.” Weighting an index by capitalization has its strengths and its weaknesses. “Smart Beta” indexes that build an index around different investment factors also have their strengths and their weaknesses. Our area of expertise-building momentum indexes-is supported by a large body of work and we believe will offer superior returns to capitalization-weighted indexes over time. Ultimately, I don’t think it is helpful to investors to try to position anything other than a capitalization-weighted index in a negative light. Investors have benefited greatly from innovation over time, and “Smart Beta” is just another step in giving investors what we believe to be better tools to help them achieve their financial goals.
Dorsey Wright provides an alternative way to get exposure to developed international markets with the PowerShares DWA Developed Markets ETF (PIZ).
A relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Past performance is no guarantee of future returns. Potential for profits is accompanied by possibility of loss. Dorsey Wright & Associates is the index provider for the suite of Momentum ETFs with PowerShares. See www.powershares.com for more information.
Burton Malkiel is a tool.
I just heard Cliff Asness state that Japan is the one market in the world that momentum has not worked on so it’s not clear that your approach would have outperformed a cap-weighted strategy in Japan.
[…] Investing is challenging enough without setting yourself up for failure by placing unrealistic expectations on active managers. I have nothing against index funds. We use them in a number of our strategies and I think many investors can benefit from using them as part of their allocation. However, they are not a panacea. […]
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