Invest Skeptically

In a previous post I alluded to the fact that most mutual funds are benchmarked against some broad market index instead of a style index. While style indices are interesting–and arguably more “correct”–the reality is that market indices are the standard comparison for marketing purposes and market index returns are the kind of data that most of us can freely access.

Market indices play another important role in that they are the basis for most ETF products–and ETFs have become a prominent means for investors to get their market exposure. This makes the market indices investable which is a key criteria for a valid index. So while they may not be sound theoretical benchmarks, they are certainly a useful measure of relative value and the opportunity cost of manager selection.