Strategic Investment Group

HOW INDEX FUNDS ARE HURT

BY VOLATILITY AND REBALANCING

September 2000

Index rebalancing and the new dynamics of market volatility have rendered specialized index funds less attractive than other risk-controlled strategies. To understand why, we must first look at how volatility is affecting the stock market. When measured over months or quarters rather than days, stock markets in recent years have been no more volatile than previously, but the volatility of individual stocks has risen sharply. This increased volatility has been offset by a decreased correlation between individual stocks, leaving overall market volatility unchanged.

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