September 21, 2007 at 12:00 pm by Tom Lydon
As the ETF industry has evolved, so has the indexing industry. It used to be that all indexes weighted their companies, or holdings, by market capitalization. Then, new indexes were created once people like Rob Arnott introduced a revolutionary theory that says holdings should be fundamentally weighted by factors such as dividends, sales or book value. Whereas market-cap weighting tends to favor growth stocks, fundamentally-weighted indexes tend to favor value stocks. Industry experts have been debating over these two strategies since the fundamentally-weighting concept was conceived.
Debates are helpful for education and igniting interest, but they’re useless when it comes to proving which method is "right." Fundamental indexes and fundamentally-based ETFs have been around only a few years; we’re only in the second or third inning of this game. A long, established track record of performance will determine which indexing strategy is best and narrow the field for investors.
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