McKinsey & Co., for example, looked at what happens when companies are added to or removed from the S&P 500. Although the announcements could “move a company’s share price” their study found “that effect is short-lived, and inclusion in a major index is not a factor in a company’s long-term valuation.” And just to cite the most egregious example: International Business Machines Corp. was removed from the Dow Jones Industrial Average in 1939 (it was reinstated in 1979). But instead of falling, IBM soared, a rise that deprived the index of 22,000 points.
Beware of making a correlation-causation error. The factors that lead a stock to be included in the index are the same ones that lead to a rising share price: Increasing revenue and profits. Of course, when a company is removed due to other factors—such as insolvency or scandal—it isn’t the removal but the underlying problems that are to blame for any subsequent poor performance.
No. 6: Stocks are richly priced, so hold cash:
The FPA managers seem to blame ETFs for the current market environment. This has led them to the wrong conclusions. Their fund has held as much as 35 percent of its assets in cash the past few years, although that has since declined. Cash is fine if markets fall, but markets gained in six of the past eight years. Given how much cash FPA has held, it should come as no surprise that the fund has underperformed its benchmark by 66 percent and trailed 99 percent of its peers during the past five years.
Perhaps the frustration of the FPA managers is understandable. But their performance issues seem to be the result of their own investment strategies, rather than any shortcomings in ETFs.
The bottom line: ETFs and index investing attract capital because they are inexpensive and outperform the vast majority of active managers. Blaming ETFs for the woes of stock-pickers misses the lesson the market is trying to teach.
This Bloomberg View column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.