Schwab Institutional hosted a webinar yesterday that addressed what seemed to be a hot debate on exchange traded fund (ETF) indexing strategies. It attempted to answer which indexing method is better: the new fundamental or the traditional market-cap weighted.
In support of the traditional market-cap weighted method was Dr. Burton Malkiel, Princeton University, Chemical Bank Chairman’s professor of economics. Touting fundamental indexing was Robert Arnott, chairman of Research Affiliates. Similar to the highly publicized debate between John Bogle and Robert Arnott, the points supporting each indexing strategy were basically the same. Market-cap weighted indexing: It’s the original, and it’s proven itself to be reliable. Market-cap tends to favor growth. Fundamental indexing: It was created as an enhancement to market-cap weighted indexing because market-cap weighting tends to favor over-valued companies. Fundamental indexing also can be re-adjusted to focus on different factors such as dividends, sales, profits, etc. Fundamental tends to favor value.
What struck me the most, however, was not where Malkiel and Arnott disagreed but where they agreed. Both men began their presentations by highlighting the views they had in common. Here I was eagerly anticipating a ferocious debate when they might as well been discussing the weather over a nice cup of coffee. There was no slander or name-calling; it was all courtesy and diplomacy. Yawn.
Anyhow, Malkiel and Arnott both agree that markets are reasonably efficient. In addition, they contend that no matter which indexing method you chose, it will most likely outperform active management. It’s so nice to see competitors put aside their differences and focus on their commonalities. Now, if we could just get politicians to follow their example…
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.