The debate continues. Is it market-cap weighting, equal weighting or fundamental indexing that is best suited for ETFs? MarketWatch has an article that helps explain the differences between indexing strategies using exchange traded funds. 

  • Market-cap weighting – an index made up of individual securities weighed by their market capitalization.  Opponents say this strategy places too much importance on the pricier stocks and less on the undervalued companies;
  • Fundamental indexing – uses measures including book value, free cash flow, sales and gross dividends to weigh companies.  Opponents say market-cap weighted indexing has consistently outperformed most actively run funds for over 30 years and does not need to be fixed.

Many ETFs have been launched recently that use more of a fundamental type strategy.  Claymore Securities has an ETF that focuses on insider buying trends and WisdomTree targets high dividend paying companies.  As these ETFs are around longer they too will build a performance history, just as the market-cap weighted funds have done.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.