Market-cap-weighted indexes, and low-cost funds that track them, have historically proven tough to beat in some markets. But tough shouldn’t be interpreted as impossible. As it turns out, many strategies that follow simple rules have fared better. And they don’t possess a magical source of alpha. Rather, their outperformance comes from a few well-known factors.
A Paradox?
Market efficiency is often cited as a big reason why market-cap-weighted indexes, and low-cost funds that track them, are so notoriously difficult to beat. Any stock’s price, and its corresponding weight, should incorporate all known information--including its current value and expected return--limiting the chance that anyone can gain an advantage.
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