Has there been significant tracking error against the CRSP Cap-based Portfolio 10 Index?
First, we don’t own all 1,900 stocks in the index. We did find out early on that we actually needed more stocks than we anticipated to track the index. Also, the CRSP indexes are rebalanced quarterly, and we didn’t want that much turnover because of the resultant transaction costs and, more importantly, tax consequences. Because these tiny stocks are very volatile, you have a much higher percentage of companies that go bankrupt every year. Of course, you also see a higher percentage of stocks that quadruple in price. So you want to own more companies to dampen this company-specific risk. Because of this volatility and the quarterly rebalancing, occasionally you’ll see these somewhat cataclysmic changes in the index. To reflect these changes and track the index, we’d have to run up trading costs and sacrifice tax efficiency. The ultra-small asset class also has some unique advantages in terms of harvesting losses. Of course, it’s easy to harvest losses in a bear market, but in a bull ma
