Buy High or Low But Not Both

A traditional complaint about index funds is that they are mechanically forced to buy high, so they tend to put more money into overvalued stocks and less into undervalued ones. For one thing, if you put money into a typical market-capitalization-weighted index fund, that fund will go out and buy stocks in proportion to how valuable they are, putting more money into high-priced stocks than low-priced ones. Also, a lot of money is indexed to large-cap indexes, and companies get added to the large-cap index when their price goes up. This means that index funds are particularly susceptible to bubbles and manipulation: If a stock goes up a lot for no reason, index funds will have no choice but to buy it.

There are, however, worse things. Here is a Twitter thread from Bloomberg’s Eric Balchunas, and (for Bloomberg Terminal subscribers) a related Bloomberg Intelligence note, about SDY, the SPDR S&P Dividend ETF, a State Street exchange-traded fund that invests in stocks with high dividend yields. Here’s the trouble: