Abstract
This article applies an annual rebalancing strategy to create portfolios of industry leaders and compares the efficiency of these portfolios with the S&P 500 Index and the CRSP market index portfolios. For the last four decades, value-weighted portfolios consisting of as few as eight or nine securities formed from industry leaders are more efficient with annual rebalancing than the S&P 500 and are indistinguishable from the CRSP market index portfolio. The findings suggest important implications for choosing appropriate benchmarks for measuring tracking error.
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