DWM Forum Topics
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- Which International Income ETF To Buy? [view article]
- Gaining Global Exposure: International ETF Dividend Investing [view article]
- International Dividend ETFs [view article]
- Debating 'Fundamental Weighting' and Indexing [view article]
- Fundamentally Weighted ETFs: Mixed Performance in '07 [view article]
- WisdomTree's EMD v.s. iShares EFA [view article]
- An 8 ETF WisdomTree Lazy Portfolio [view article]
- A List of Dividend ETFs [view article]
- Interview: Luciano Siracusano, Director of Research for ETF Firm WisdomTree Asset Management [view article]
loading ...Recent DWM Articles
- Which International Income ETF To Buy?
- Gaining Global Exposure: International ETF Dividend Investing
- Debating 'Fundamental Weighting' and Indexing
- Fundamentally Weighted ETFs: Mixed Performance in '07
- WisdomTree's EMD v.s. iShares EFA
- No International ETFs Currently Oversold
- A List of Dividend ETFs
- WisdomTree DEFA Fund: A Case For Fundamental Indexing?
- International Dividend ETFs
- How Does BGI's New Dividend ETF Stack Up Against WisdomTree's Offerings?
- Full List of Articles »
Which International Income ETF To Buy? [view article]
Would tax considerations be extremely complex? ReplyPseudonym
Which International Income ETF To Buy? [view article]
The ETO chart looks promising, but I would not buy until it bounces off of $25, retests and closes above $25.At that point we could have a nice upward run in the making. Reply
Which International Income ETF To Buy? [view article]
""The discount is so high it makes me believe the fund is holding some illiquid assets.""You think that 12% discount is high? In CEF land, that's not very high. And I'm amused that you think the fund is holding illiquid assets just because you think the discount is high. Reply
Gaining Global Exposure: International ETF Dividend Investing [view article]
iShares has sector ETFs based on S&P Global indices. They are convenient if you have strong sector convictions that transcend national borders. ReplyGaining Global Exposure: International ETF Dividend Investing [view article]
"User 214737": try Diageo (DEO), a London based liquer distributor that has a great network. I own it. ReplyGaining Global Exposure: International ETF Dividend Investing [view article]
D4L,I am all for international exposure. I am currently lacking it in my stock/dividend portfolio (except for couple of mutual funds in 401k). Do you have any specific international dividend stocks in mind? Reply
International Dividend ETFs [view article]
State Street has a new one - DWXIf nothing else it's interesting because it has a 25% cap on sector (financials, anyone?) and has 10% (capped) emerging market exposure. Reply
Debating 'Fundamental Weighting' and Indexing [view article]
The debate is moot considering the basic objective of the two types of funds are like comparing chickens to roosters. Your average Index fund, S&P, Russel, or any other is based on incresed valuation. Your basic fundamental indexing ETF is based on income producing yield. The best move for the average investor is to place the fundamental index funds in a tax deferred account, Roth IRA, Trad IRA, or 401 and grab the yields. Investing in traditional index funds could go either way in a tax deferred account or an open account. Diversity is still the key to making money. Replyts
Debating 'Fundamental Weighting' and Indexing [view article]
Assembling portfolios of companies ordered simply by the price a market has assigned them is perfectly fine as A method of assembling an index. But to give this method some sort of primacy seems self-evidently irrational.If you needed to buy 10 hens once a year, you probably you would do okay by simply going to the market, finding the 10-chicken-pen that the market has assigned the greatest value to, and buying those chickens, year in and year out.
But what if you went back to the market one year and, in addition to just the market price, each pen had another number which was the egg yield: the number of eggs laid during the past year divided by the market price? And another number: new chickens hatched divided by the market price?
In the former case the market has looked at all the pens and assigned each a value. This value is based part on past performance and part of future expectations. But you have no information how much of the value is based on actual performance and how much is based on expectations. In this case you have information about the entity, the chicken pen, but this information is secondary, derivative. The price is reflective of the value of the chicken pen, but it is not the value.
In the latter case you still have this secondary, derivative information of market price assigned. But now you have additional information, and this data is primary to the object itself: egg production and fertility numbers.
Instead of calling it a market cap index it really should be called a "high hopes and expectations" index because, though analysis on the hard fundamental data is part of the price assignation, no effort is made to order market-cap weighted indexes on anything other than that: market value. In this sense these types of indexes are ordered, by varying degrees, on the hopes and prayers of market participants.
Ordering hens or stocks in accordance with more objective performance measures does not totally expunge the index of hopes and prayers. You are basing this ordering on past performance in the hopes that past is predictive, which often it is not. But there is no doubt less hoping and praying, and therefore more science, inside a fundamental index than inside a cap-weight index.
There is indeed the problem that ordering indexes on fundamentals introduces overweighting to certain sectors, and these, and other problems, need to be addressed. But as we saw during the last great bubble, there were huge overweightings that happened inside of market-cap weighted indexes as well. What got overweighted was euphoria, irrational exuberance, and stocks getting priced higher and higher, growing more and more "valuable" simply because they kept going up and up, until many of the high priced chickens got their heads chopped off, ran around a little more, ran off a cliff, or simply keeled over, and died.
Buying a market-cap weighted index isn't as uncertain as buying 2 chickens in a bush, but more uncertain than buying a fundamentally-weighted index, which is closer to buying 1 chicken in hand.
We are always to some degree, even inside an index, picking stocks. There is a lot of slicing-and-dicing silliness going on around indexing, and more to come, but ordering and packaging securities in accordance with fundamentals such as earnings, sales, book value, or dividends is a valid way to construct an index. To do so is no less valid than ordering an index in lockstep to the values assigned to securities by a herd. Market herds can be smart, and most of the time correct, but sometimes they do stupid things. An index doesn't have to be constructed to slavishly follow them everywhere, even over a cliff, to be correct. Reply
Considine
Debating 'Fundamental Weighting' and Indexing [view article]
Nice article Dr. DeLong! I find the whole debate on this issue rather odd. The primacy of market cap weighted indices hinges on a strong version of market efficiency. Fundamental advocates point out a body of evidence that fundamental weights such as low P/E have historically led to high performance. Frankly, I find the market cap weight folks the more odd: they are pushing for the idea of strong market efficiency despite enormous evidence to the contrary.To suggest that market cap weighting is 'indexing' while some other weighting is 'active' is strange. Both rely on a fairly arbitrary assumption about how to weight assets. Market cap weighting will have less turnover, which is good, but is not enough to make the case that this is the 'best' way to create a portfolio in an asset class.
My biggest issue with fundamental indices is the way that they are promoted. Filters on fundamental value have resulted in high concentrations of certain asset classes. The dividend-focused approach tended to result in high exposure to financials, for example. Many investors did not really understand this.
Mr. Bogles comments quoted in this article are correct, but I also find Mr. Bogle's long-term insistence that it makes good sense to own at market cap weight is not compelling.
Cheers,
Geoff Reply
ts
Debating 'Fundamental Weighting' and Indexing [view article]
Irony: if or when everyone in the world adopts the efficient market religion and simply buys an index fund, the market will be maximally inefficient because there will be nobody left doing the head scratching analysis that supposedly renders the market efficient in the first place. So there is a symbiotic relationship between active and passive investors. Both need the other to make their version of extracting returns from the market possible. More passive investors means less stock analysis means more market inefficiency. More active investors means information is more fully, more quickly, priced, means more market efficiency. Stock pickers need indexers. Indexers need stock pickers. Both make the other's world go round. ReplyDebating 'Fundamental Weighting' and Indexing [view article]
"Fundamental Indexing" is just a bassackwards way of saying they're running a large, slow-trading, mechanical quantitative equity fund.Not that there's anything wrong with that style of trading! It's great, especially for a fund seeking relative outperformance, to be holding stocks with fundamental or valuation "anomalies," but let's call a spade a spade, it's *mechanical trading.*
I object only to the marketing aspect of its name. Reply
Shriver
Debating 'Fundamental Weighting' and Indexing [view article]
Good article. Good points. Thank you. ReplyEditors
General Discussion on DWM
Is this a buy or a sell? ReplyFundamentally Weighted ETFs: Mixed Performance in '07 [view article]
I think it is time to see through the veil of what a cap-weighted index really is……a glorified momentum index. WAIT! That is comment is sacrilegious! Defend yourself!Okay, one only needs to look at the sector mix of an index to see the change in market weight caused by the momentum effect. As an example, In December of 2002 the E-Trade Russell 2000 Index Fund composition was approximately 70% small-cap value/ 30% small–cap growth. Three years later (December 2006) the index was approximately 20% small-cap value/ 80% small–cap growth. Imagine trying to beat the small-cap index as a small-cap value manager during those three years!
Let’s take it a step further; pretend you were a small-cap growth manager during this booming three year run. Your track record looks good as you capitalized on this momentum and you soundly beat the small-cap index. On the wings of good fortune you get hired by the institutions and investors. Then the enviable happens, the sector rotates back to small-cap value (and/or some other asset class) and your performance drops and you fall out of favor.
In this example its evident indexing small-cap stocks using a cap-weighted approach capitalizes on the change in momentum while fundamental indexing would have given a more accurate description of how the small-cap securities actually performed.
I don’t have enough data points to judge weather fundamental indexing is better or worse than cap-weighting indexing but I do believe the momentum effect may favor cap-weighting, albeit with more volatility. So the trade-off of risk-adjusted returns is open for debate. What is clear to me is that cap-weighting is nothing more than a momentum strategy masked in the guise of a passive strategy. I’m sure if this were a chat log I’d burn in flames! I applaud Rob Arnott’s work on fundamental indexing and appreciate anyone challenging the norms of convention wisdom.
Reply