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Ownership, Earnings, and Cost Control Proves Beneficial



Market-cap mutual funds and ETFs are very common, but many investors do not realize the disadvantages of market-cap weighted index funds. Because the stocks they hold are weighted based on size, there is no consideration given to the actual health and quality of the firms. Companies are removed when they fall below the market-cap requirements, which means investor results are already impacted before the stock is removed. Other challenges include behavioral herding impact, taxes and transparency. When considering the shortcomings, it is easy to see that results can be negatively impacted.

When considering the additional shortcomings of mutual funds and ETFs, like pooled ownership, tax inefficiency, hidden fees and trading cost, and small investor behaviors, it’s easy to see that results can be dramatically impacted.

The Linden Thomas US Equity Large/Mid-Cap Growth 100 Index utilizes Separately Managed Accounts (SMA) so that the shortcomings of market-cap index mutual funds are eliminated. We call this approach Institutional-Direct. The index itself utilizes 9 quality screens, a tax advantage overlay, and equal weighting to help ensure that stocks chosen for inclusion are companies with strong quality factors, while increasing tax efficiency.

It really comes down to the 9 quality screening factors:

• Strong Earnings Growth
• Strong Sales Growth
• Low reinvestment needed in company
• Effective deployment of capital
• High conviction from analysts
• Price to book ratio
• PE Ratio
• Dividend Yield
• Price to sales ratio

The tax advantage overlay minimizes tax liabilities in taxable accounts that track the index. This is achieved by considering both the long-term and short-term gains of each security during reconstitution, so that the quality factors are balanced with the tax implications.

By giving clients exposure through SMAs, they receive direct ownership of the stocks, which offers full transparency and control for tax-loss harvesting and gifting of individual stocks. Direct ownership also eliminates hidden costs and small investor behaviors like trading cost and herding, which eat into investor results.

Ultimately, the Linden Thomas Quality-Focused Indexes approach indexing with the belief that the quality of a company’s earnings will impact the stock’s performance over time. The direct ownership gives investors transparency and the ability to control costs. Over time, these attributes enhance results and can make a real difference during retirement.

Linden Thomas & Company

One of America’s Top Wealth Managers builds a better Index

At Linden Thomas, we believe most indexes focus on the wrong things like weighting the index based on the size of a company (market cap).

We agree with many long-term academic studies that continue to validate the importance of how quality earnings are directly connected to real equity performance…

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