May 1, 2025
Marco Sammon joins Ben and Dan to unpack his latest
paper, ‘Index Rebalancing and Stock Market Composition’, beginning
with how Marco’s work (co-written by John Shim) compares to the
Nobel Prize-winner Bill Sharpe’s paper, ‘Arithmetic of Active
Management.’ We investigate the missing links in Sharpe’s logic
before defining “the market” and ascertaining the main objectives
of index funds. Then, we dive deeper into the mechanics of Marco’s
paper, index and market tracking errors, why delayed rebalancing is
more beneficial than instant rebalancing, and the role of
technology in the modern tracking error obsession. We also assess
the passive-active spectrum of index funds in portfolio management
and learn how investors should choose their optimal excess return.
To end, Marco shares practical applications for improving
performance benchmarked against traditional indexes, and The
Aftershow is all about bridging the gap between PWL Capital and
you, our listeners.
Key Points From This Episode:
(0:00:00) Key takeaways from Marco Sammon’s latest paper and how it compares to Bill Sharpe’s ‘Arithmetic of Active Management.’
(0:08:10) Marco describes what’s missing from the ‘Arithmetic of Active Management’ logic.
(0:09:11) Defining ‘the market’, the main objective of an index fund, and how index funds track the market.
(0:15:57) The mechanics of Marco’s paper, ‘Index Rebalancing and Stock Market Composition.’
(0:18:38) Factor exposure, index and market tracking errors, and how often index funds trade.
(0:26:28) Rebalancing less frequently; why delayed does better than instant rebalancing.
(0:31:59) The tech run-up and lazy rebalancing, and the modern tracking error obsession.
(0:36:51) Assessing the passive-active spectrum of index funds in portfolio management.
(0:41:02) Exploring how investors should decide on their optimal excess return.
(0:45:14) How the rising index fund ownership of stocks impacts the implicit cost of indexing
(0:46:58) Practical ways to improve performance benchmarked against traditional indexes.
(0:52:30) The Aftershow: Canadian finances, more airtime for Cameron, and PWL – OneDigital.
Links From Today’s Episode:
Meet with PWL Capital — https://calendly.com/d/3vm-t2j-h3p
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemind
Rational
Reminder on TikTok — www.tiktok.com/@rationalreminder
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin
Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Dan Bortolotti on LinkedIn — https://www.linkedin.com/in/dan-bortolotti-8a482310/
Episode 322: Prof. Marco Sammon: How are Passive Investors Affecting the Stock Market? — https://rationalreminder.ca/podcast/322
Episode 200: Prof. Eugene Fama — https://rationalreminder.ca/podcast/200
Episode 268: Itzhak Ben-David: ETFs, Investor Behavior, and Hedge Fund Fees — https://rationalreminder.ca/podcast/268
Episode 112: Michael Kitces: Retirement Research and the Business of Financial Advice — https://rationalreminder.ca/podcast/112
Marco Sammon — https://marcosammon.com/
Marco Sammon on LinkedIn — https://www.linkedin.com/in/marco-sammon-b3b81456/
Marco Sammon on X — https://x.com/mcsammon19
Marco Sammon | Harvard Business School — https://www.hbs.edu/faculty/Pages/profile.aspx?facId=1326895
Marco Sammon Email — mcsammon@gmail.com
John Shim on LinkedIn — https://www.linkedin.com/in/john-shim-2931271b/
Vanguard — https://global.vanguard.com/
Sheridan Titman on LinkedIn — https://www.linkedin.com/in/sheridan-titman-226b0811/
Alex Chinko — https://alexchinco.com/
Erik Stafford | Harvard Business School — https://www.hbs.edu/faculty/Pages/profile.aspx?facId=6625
Itzhak (Zahi) Ben-David on LinkedIn — https://www.linkedin.com/in/ibendavi/
Bill Ackman on X — https://x.com/billackman
‘Millennium Loses $900 Million on Strategy Roiled by Market Chaos’ — https://www.bloomberg.com/news/articles/2025-03-08/millennium-loses-900-million-on-strategy-roiled-by-market-chaos
Bogleheads — https://www.bogleheads.org/
The Money Scope Podcast Episode 8: Canadian Investment Accounts — https://moneyscope.ca/2024/03/01/episode-8-canadian-investment-accounts/
The Wealthy Barber Podcast — https://thewealthybarber.com/podcast/
Financial Advisor Success Podcast — https://www.kitces.com/blog/category/21-financial-advisor-success-podcast/
Financial Advisor Success Podcast Episode 433: When You 10X Your Advisory Firm To Over $20M Of Revenue…And Want To 10X Again, With Cameron Passmore — https://www.kitces.com/blog/cameron-passmore-pwl-capital-10x-revenue-growth-advisory-firm/
OneDigital — https://www.onedigital.com/
The Longview Podcast: Ben Felix
Papers From Today’s Episode:
‘The Arithmetic of Active Management’ — https://www.jstor.org/stable/4479386
‘Index Rebalancing and Stock Market Composition: Do Index Funds Incur Adverse Selection Costs?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5080459
‘Luck versus Skill in the Cross-Section of Mutual Fund Returns’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021
‘The Passive-Ownership Share Is Double What You Think It Is’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4188052
‘Long-Term Returns on the Original S&P 500 Companies’ — https://www.researchgate.net/publication/247884354_Long-Term_Returns_on_the_Original_SP_500_Companies
‘The Price of Immediacy’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1001762
‘Competition for Attention in the ETF Space’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3765063
‘Passive in Name Only: Delegated Management and “Index” Investing’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3244991
Jeremy Stein — “Unanchored” Strategy