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The cost of indexing – and an approach how to reduce those costs



There is a cost to indexing that most investors are unaware of. It is called “reconstitution.” What is reconstitution and how may the costs involved be solved?

What is an index? An index tracks changes in the markets – think of it kind of like a weather barometer.

"Index Reconstitution: The Price of Tracking."   The first article discusses how the reconstitution effect increases the costs of adhering strictly to the holdings of an index. Each year, the index committee typically adds and removes, companies. These changes affect prices and timing.

"Solving the Investment Problem: The Fundamentals of Asset Class Investing." This second article discusses an alternative approach to experiencing the costs of index reconstitution, called “Asset Classes,” which allow the fund manager broader leeway as to when to buy or sell, along with a broader range of holdings. This discussion begins in the section called “Decision Two: Indexing or Asset Class Investing?”

Photo: File:Barometer Goethe 03.jpg on Wikimedia Commons


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