Editor’s Letter

This issue opens with Haslem’s examination of the theories of advertising and investor behavior that apply tomutual fund advertising and investor choices. He finds, among other things, that highly educated and wealthy mutual fund investors as well as more financially savvy investors tend to make poorer fund choices. Although research indicates capitalization-weight orthodoxy is inefficient and underperforms valuation-indifferent approaches, it now dominates in the equity indexing world. Lamm demonstrates that employing an equal country weighting scheme for emerging markets would have outperformed cap-weighting for the past quarter century. This article is followed by a study by Boney, who examines the addition of REITS to the S&P 500 Index. Boney looks at whether the relationship between the implied volatility measure, VIX, and REIT price volatility change after addition to the index. In their article, Innocenti, Malpenga, Menconi, and Santoni investigate the intraday minute by minute relationship between the S&P 500 Index Futures and the three major European stock indexes, finding that the well-established positive correlation between futures and stock indexes extends to these specific cross-country cases.

In the next article, Rompotis investigates the performance of U.S.-listed actively managed exchange-traded funds. He looks at the ability of active managers to time the market and deliver significant excess alpha. Rompotis also considers the performance difference between ETFs and the markets as well as their relative risk and return. It is well established that holding leveraged ETFs over an extended period of time generally results in returns substantially less than the daily multiple might imply, because of the compounding problem caused by the volatility of returns. Trainor finds, however, that in periods of low volatility the compounding issue can actually work to the benefit of investors.

In his article, Shepherd responds to debates on the effectiveness and source of outperformance in Fundamental Indexing. And, finally, we conclude this issue with Razafitombo and Terraza’s presentation of the similarities and differences of mutual fund performance according to the domiciliation of the funds.

We welcome your submissions. Please encourage those you know who have good papers or have made good presentations on indexing, ETFs, mutual funds, or related subjects to submit them to us. We value your comments and suggestions so please e-mail us at journals{at}investmentresearch.org.

TOPICS: In Portfolio Management, mutual fund performance, portfolio construction, exchange-traded funds and applications

Brian R. Bruce

Editor-in-Chief

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