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Ben Felix - Why Not All Index Funds Are Created Equal | Common Sense Investing

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Author: Ben Felix
Categories: Personal Finance
Tags: finance
Views: 2 · Last viewed: 2026-10-16 10:04 UTC

Short Summary

Main recommendation: Invest in cap weighted total market index funds, such as ones tracking the CRSP 1-10 for US stocks or the MSCI All Country World Index globally, rather than sector, smart beta, or other specialty index funds that charge higher fees for little benefit. Ben Felix argues that the financial industry creates specialty index products mainly to justify higher fees, not to improve investor outcomes.

Key Points

  • Most widely quoted indexes, like the S&P 500, are market capitalization weighted, meaning larger companies carry more weight, and the S&P 500 only covers large cap stocks.
  • The CRSP 1-10 covers over 3,500 US stocks, the vast majority of US market value, including the smaller stocks the S&P 500 (which covers about 80% of market value) misses; historically small and mid-cap stocks have had higher returns than large caps.
  • Sector index funds, such as the Horizons Marijuana Life Sciences Index ETF (MER 0.75%), are speculation on hot sectors with no rational investing case, according to Felix.
  • Smart beta funds target factors like size, relative price, momentum, and profitability, drawn from research by Fama and French (1992), Carhart (1997), and Novy-Marx (2012), but execution has been inconsistent.
  • The iShares multi-factor ETFs did not deliver the factor exposure they promised, according to a 2016 analysis by Justin Bender, despite costing more than a total market ETF.
  • In their 2014 paper 'Long-Term Capital Budgeting,' Campbell Harvey, Yan Liu, and Heqing Zhu examined 600 factors from academic and practitioner literature, finding not all would be expected to improve investment outcomes, yet they give fund companies a reason to charge higher fees.

Details Worth Noting

  • Concrete instructions:
    • Build the core portfolio from cap weighted total market index funds covering Canadian, US, international, and emerging market stocks.
    • Choose low-cost options: Felix cites the Canadian Couch Potato ETF model portfolios, which are globally diversified total market index portfolios with a weighted average MER of around 0.15%, as an example.
    • Avoid sector index funds and most other specialty index products that charge extra fees, unless you are deliberately speculating.
    • If you want factor exposure, Felix recommends products from Dimensional Fund Advisors, a fund company with a long history of capturing well-researched factors, which he uses in portfolios he oversees.
  • The MSCI All Country World Index is a total market index covering the whole world, and an ETF tracking it is included in the Canadian Couch Potato model portfolios.
  • Felix notes that for most investors, a portfolio of cap weighted total market index funds is all that is needed; other index products claiming special status are described as gimmicks.
  • Felix's view on smart beta factors reflects his own perspective, and he notes that some factors are better researched than others.

Bottom Line

Simple, low-cost, cap weighted total market index funds are the core of a sensible portfolio, and most specialty index products add fees without a clear benefit.