Fundamental indexing has become as common a topic as exchange traded funds (ETFs) as many investors want to beat the market through indexing. To a traditional indexer, trying to beat the market by indexing isn’t just heresay- it’s illogical. The simple idea of indexing- buy and hold all the stocks that make up a market benchmark and achieve average returns, instead of trying to beat the market with active stock picking-has become a strategy all on its own. The traditional method weights by market capitalization through indexes such as the S&P 500 or Russell 1000.
Fundamental indexers claim that in a momentum-driven market like that of the late 1990’s, such a traditional indexing strategy could lag, reports Paul J. Lim of The New York Times. The new approach forces investors to make several decisions, and some argue this is bordering on active management. Many fundamental index funds charge more in fees and have higher turnover rates. The focus is on fundamental factors instead of market capitalization and therefore favors value-oriented stocks and smaller stocks.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.