Cap-Weighted Indexing Revisited

Abstract

The author first observes that arguments that indexing is a momentum strategy, a large cap strategy, or even a style of investing that is sometimes in fashion and sometimes out of fashion are misleading. He then counters these arguments with a careful, non-standard definition of cap-weighted indexing, which distinguishes between the amount of the company being purchased and the amount of money that this purchase costs. He concludes that the argument that cap-weighted indexing is a momentum play is false, as it fails to distinguish between the amount of the company being purchased and the cost of this purchase. It also fails to distinguish between a bet that a portfolio is making relative to the market, and one that is made by the market as a whole. Thus, by defining indexing as the purchase of the same fractional amount of each company, it becomes apparent that indexing is not a momentum play, a size play, nor a style play.