How Indexing Works in Financial Literacy

McGraw Hill Financial (MHFI), the parent company of S&P Capital IQ and SNL, supports the New York Public Library’s Science, Industry, and Business Library (SIBL) in their Financial Literacy campaign.  Last week, MHFI’s Corporate Responsibility and Sustainability team Co-Sponsored the semi-annual Financial Planning Day.  MHFI was asked by the organizers to provide an information session to attendees on how indexing works.

Dr. David Blitzer, Chairman of our S&P Dow Jones Indices Index Committees and I each presented, while Shaun Wurzbach, Global Head of Financial Advisor Channel Management for S&P Dow Jones Indices, served as moderator. According to Wurzbach, index education from S&P Dow Jones Indices combined with fund education from S&P Capital IQ would help the audience to better understand some of the choices for investment that they might find in everyday life such as investing with funds in an Individual Retirement Account (IRA) or through a 401K plan.  Here are some of the key points which David and I communicated since they might be of help to you:

Dr David Blitzer, S&P Dow Jones Indices:

  • Over any period of a year or more, about 2 out of 5 mutual funds outperform and three of five underperform their benchmark.
  • Good performance does not persist for many active mutual funds -- 40% chance of beating an S&P benchmark  in 1 year, 16% for two years in a row, 6% in three consecutive years. 
  • Why?  Index products typically have lower fees than active products  - best to keep as much of your money as you can, not give it away to manager fees.

Todd Rosenbluth, S&P Capital IQ and SNL:

  • Finding actively managed funds that outperformed the S&P 500 index over the short and long term is hard. This is why investors pulled $150 billion out of active mutual funds and ETFs in the 12 months ended September and added $461 billion to passive products according to Morningstar data.
  • For those that want active management, they should seek out funds with a below-average expense ratio, an experienced management team running the fund under consideration and that has generated strong returns with below average volatility.
  • If investors do their homework they can reduce likelihood of a below-average fund, but it may still end up in their portfolio. So a low-cost passive ETF such as Vanguard 500 Index (VOO), with a 0.05% expense ratio, may be appropriate.

The audience of 75 was interested, attentive, and asked very good questions, such as “why use an equally weighted index rather than the S&P 500?” and “Can an index keep pace with rapidly adopted innovations in an economy, or is it too passive to do that?”

McGraw Hill Financial Literacy Campaign

Todd Rosenbluth (Left) and David Blitzer pose next to the McGraw Information Services Center at the New York Public Library

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