A Triumph for Indexing

March 5^th 2013 was a day of triumph for indexing. 

 

That day, the Dow Jones Industrial Average fully recovered from its 2009 financial collapse. As it has during every other past bear market, the index overcame all the negative headlines, all the shrill bears, the extremist doomsayers, the scorching US presidential campaign, unending political conflicts and even those cool pessimistic analysts to not just fully recover from the massive drawdown of 2009 but to, more recently, post new all-time highs.

These past weeks offer, once again, evidence of the superiority of indexing for investors seeking long-term capital appreciation. If nothing else, March 5^th should silence the critics of indexing methodology.

Few active managers have outperformed the indexes over the last four years (or any period, for that matter). Once again, the long-term index investor prevails with minimal costs, minimal trading and excellent, if not maximal, returns. Of course, indexing risk (or market risk) may be a little higher than what could be obtained by the rare disciplined manager. Proper indexing, though, offers its own form of long-term risk management.

It's funny how this triumph is hardly noticed in the press or by most financial professionals. There is actually little incentive for financial pros to promote indexing. Indexing is a direct challenge to active management of all flavors and the active manager's fees.

Good managers exist but the the selection process is far too difficult for most investors. It's a luck of the draw of the distribution of manager returns. Indexing avoids this process and avoids the many catastrophes of those chasing yield.

As a commodity manager who is a proponent of indexing, these results are gratifying.  The case may yet be made that equity indexing results equally apply to commodities.  I  believe they do.  Indexing is a secular methodology that is applicable to all fairly traded assets.   To the extent that commodities are properly screened, well-constructed and correctly weighted, proper commodity indexes offer the same benefits as their equity peers.

Today’s commodity markets are down and significantly off their highs.  A properly executed indexing strategy combined with today's lower market levels make this both a tested and timely opportunity.