ETF Trends
ETF Trends

In the investment world, there are two sides to indexing, and lately the influx of exchange traded funds (ETFs) has spurred this controversy further. Traditionalists are long-time supporters of the market-cap weighted index, where companies are valued by their total market capitalization. The 21st century’s fundamental indexing approach has proliferated with the success of many ETFs utilizing this structure. Fundamental indexing weighs companies on factors other than market capitalization, such as dividends, sales, profits, etc.

Jeffrey S. Coons for Investment News says this argument has resulted in a past-performance debate instead of focusing on the essential question: "Are investors able to achieve returns adequate to compensate for the risks of owning stocks?" If acquiring returns adequate to the risk taken is the goal, then the fundamental indexing approach tends to come out ahead. However, market-cap weighted index proponents say fundamental indexing is nothing more than an actively managed approach to indexing, which defeats the purpose of ETFs tracking an index. As the debate continues, investors are left to make up their own minds and decide what works best for their portfolio.

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.