Editor’s Letter

roBerT Dunn General Manager To open the Winter 2019 issue, Zorina, Khatri, Zhu, and Rowley. test two measures of market volatility for their potential relationship with growth in indexing assets and selected macroeconomic factors. The analysis demonstrates that macroeconomic factors have a strong correlation with and are useful predictors of market volatility; on the other hand, growth in indexing assets does not exhibit any causal relationship with market volatility. Bender, Nagori, and Tank revisit the long-documented index effect. Their findings show that the index effect is present in the global indices, particularly the MSCI World Small Cap and MSCI Emerging Markets Indices. Security characteristics matter as well, as the index effect is stronger for larger securities (relative to their index). They also find that the index effect appears to hold further ahead, for instance a month before the index rebalance date. Next, Esakia, Goltz, Luyten, and Sibbe evaluate whether the size factor still has its place in multi-factor portfolios. They suggest that the size factor improves model fit, delivers a significant positive premium in the presence of other factors, and contributes positively to the performance of multi-factor portfolios. Additionally, omitting the size factor has substantial cost to investors, which often exceeds that of omitting other popular factors. Crouse evaluates monthly leveraged investment products and shows that they improve returns because markets are less volatile on a monthly timescale, but they remain problematic as buy-and-hold investments due to the risks of large drawdowns and catastrophic losses. He characterizes these risks through higher-order moments and identifies attributes of LIPs to mitigate these risks to benefit both LIP investors and LIP sponsors. Ge studies the use of low-volatility assets for the purpose of retirement planning and the choice of ideal glidepaths. The article concludes that when equipped with proper low-volatility assets and carefully chosen glidepaths, retirement plan managers may both improve the odds that their plans succeed and increase the expected final wealth levels. To complete this issue, Malladi evaluates performance of three children-oriented indices and finds that the KIDS indices consistently outperformed the traditional S&P 500 market index in both absolute and risk-adjusted terms. The author suggests that these indices can be used in advancing financial literacy in high schools and among parents since they are easily understood due to their familiarity with composition and construction methods. As always, we welcome your submissions. Please encourage those you know who have papers or have made good presentations on indexing, ETFs, mutual funds, or related subjects to submit them for consideration. We value your comments and suggestions, so please email us at journals@investmentresearch.org.