S&P 500 Shows Passive Aggressive Side

There is a debate raging in the investment industry about the merits of fundamentally weighted indices vs. the traditional capitalization-weighted index approach.

A fundamentally weighted index's components are selected based on factors such as revenue, earnings and book value, while a capitalization-weighted index is based on the size of a company's market cap.

The argument centers on how efficient markets are and whether it is possible to "build a better mousetrap" by doing something other than taking a passive, market-cap-weighted approach to building an index.

But the one thing that almost never gets mentioned in this debate is that the penultimate poster child for passive indexing, the S&P 500, appears to be an actively managed, subjective portfolio in disguise. ...