‘Value investing’ seems like a fairly straightforward concept, but many investors have realized that there are nuances to value investing—especially in light of large losses in some value-oriented strategies in 2008-2009. The idea seems simple: buy stocks that are relatively low-priced, as measured by dividend yield, price-to-earnings ratio, or price-to-book. There are studies going back decades that have noted that buying stocks at low P/E ratios tends to yield have average total returns than buying stocks at higher P/E ratios (see Malkiel’s A Random Walk Down Wall Street, for example). Fama and French identify ‘value’ as a statistically robust predictor of higher returns. Rob Arnott has further popularized this idea with ‘fundamental indexing.’

One challenge for value investors is that any given statistical metric of value can mean different things. Dividend yield, in particular, is a problematic measure. The dividend yield can be high because a company is solid and throws off robust earnings that are returned to shareholders, but dividend yield can also be high for a company in distress that has seen its stock price plummet but that has not yet seen its dividends reduced to reflect its current status. There are other challenges, too. Some companies employ ‘leveraged’ dividend strategies in which they will pay out more in dividends than their actual earnings. This surely cannot be compared to companies that only pay shareholders a fraction of real earnings.

Below is a list of ETFs currently considered 'overbought' using data from Finviz.com. In this case, overbought is defined as having an RSI (14) of over 80. Stocks and ETFs can remain overbought for extended periods of time and one can use multiple ways to define 'overbought'. However, RSI serves as a good first indicator. The theme from the list below is that preferred issues may be due for a pullback after a nice runup since March 6th (many of which have more then doubled since the 3/6 lows):

Data Source: FINVIZ

There’s an ongoing debate about indexing when it comes to ETFs, and each side continually brings out new evidence and information to bolster their arguments.

Proponents of fundamental indexing contend that mutual funds and ETFs based on the S&P 500 are flawed in their designs, reports John Spence for The Wall Street Journal. The S&P 500 can be top-heavy with companies that have large market value, adding weight to the stocks.

By Matthew Hougan

Well done, Jim: Rob Arnott invites you to his board meeting, and you call him out for under-performance. (See Jim Wiandt's blog about the Research Affiliates board meeting here.) Remind me not to invite you over to dinner anytime soon.

By Matthew Hougan

What's the best U.S. total market ETF?

If you're looking at January performance, the answer is clear: the ELEMENTS Benjamin Graham Total Market ETN (BVT).

By Elli Malki

Towards the end of the last century, academic finance economists came to take seriously the view that aggregate stock returns are predictable.

Since first jumping into the exchange-traded funds market two-plus years ago with 20 dividend-weighted portfolios, WisdomTree Investments has firmly been cast as a value-styled management shop.

That focus on weighting index-based ETF portfolios on business fundamentals—rather than traditional market-cap size figures—hasn't changed. But the New York-based firm launched Thursday an ETF focused squarely on large-cap growth stocks.

Is there anything an exchange traded fund investor can do in a down market such as this besides grin and bear it?

Investment strategies such as stock picking and bond investing are all in the red, so why not a fundamentally weighted indexed ETF?

Ed McRedmond is the senior vice president of portfolio strategies at Invesco (IVZ) PowerShares. He joined the exchange-traded funds provider in 2005 after working for 17 years at A.G. Edwards, where he was associate vice president. While at A.G. Edwards, McRedmond served as a senior analyst covering ETFs and closed-end funds and was part of the team that launched and managed A.G. Edwards' discretionary ETF wrap portfolios.

Earlier this week, IU.com Managing Editor Murray Coleman caught up with McRedmond to find out the reasons behind PowerShares' recent plan to cut fees on its fundamentally based ETFs, as well as developments with other products. (See related story here about the changes to the funds, which are maintained and designed with FTSE Group and Research Affiliates.)

By Matthew Hougan

News that PowerShares (IVZ) is lowering fees on the FTSE RAFI exchange-traded funds says good things about the ETF market.

PowerShares (IVZ) announced late Friday that it plans to slash expense ratios on its 11 exchange-traded funds that use Research Affiliates' fundamental indexing approach.

The ETFs now have expense ratios capped at 0.60%, according to a PowerShares spokesperson. Those fees will be reduced to a uniform 0.39% on Nov. 1.

By Matthew Hougan

When I heard that Dow Jones had selected Kraft Foods (KFT) to replace AIG (AIG) in the Dow Jones Industrial Average, I couldn't believe it.

Kraft?  I mean, I love mac 'n' cheese as much as the next guy, but... Kraft? 

There are three key approaches to indexing that are competing for investor attention:  Market-Cap Weighting, Equal Weighting, and Fundamental Weighting.  Let’s explore how they differ.

The exchange traded fund [ETF] world has blossomed with the introduction of designer exchange traded funds [ETFs] that apportion their holdings according to some statistical process other than mere market cap. There are ETFs from Wisdom Tree that apportion their holdings according to total dividend payments.

Along similar lines the SPDR Dividend ETF (SDY) invests in the 50 highest-yielding companies in the S&P Composite 1500 that have consistently raised their payouts for at least 25 years. On the other hand, the PowerShares FTSE RAFI US 1000 (PRF) evaluates the 1,000 biggest U.S. companies on the basis of average sales and cash flow over the previous five years, total dividends distributed over the previous five years and latest book value (assets minus liabilities) and apportions its holdings according to a formula based on these factors.

Open-Ended Funds of ETFs Slow to Grab Hold

The concept of an open-ended "fund of ETFs" has yet to gain any momentum. Could it be that the right time has simply not yet arrived?

Most of these types of funds are less than two years old, and the aggregate of net assets of the group total $251.6 million, less than 1% of all fund assets, reports Richard Widows for The Street.

Joseph Nocera reviews the bidding in the NYT - Passions Run High on Indexing:

By Jim Wiandt

Market-cap-weighted ETFs (exchange-traded funds) are being pushed by all sorts of alternatives, from Rob Arnott's fundamental-based strategy to WisdomTree's dividend and earnings focus.

But a new twist is coming. A trio of ETFs launched Friday, each an offshoot of popular Standard & Poor's benchmarks. They'll use the same stocks as their traditional S&P benchmarks. However, the ETFs will weight names by revenue rather than market-cap sizes.

IndexUniverse has an article up that recaps 2007. It notes that fundamental indexing like the RAFI ETF (PRF) and some of the WisdomTree funds lagged the cap weighted funds. This was more of a domestic (rather than foreign) phenomenon.

The article even quotes Bruce Lavine from WisdomTree offering some explanation. The article attributes the following quote to Lavine: "There are some unique characteristics about the U.S. market that have just been tough this year. That had to do with getting let down by companies that had solid fundamentals on paper."

The debate over fundamentally weighted indexes has become a common topic of discussion in indexing circles. Detractors of the theory argue that it results in indexes with a small-cap value tilt, and as of December 31, they can now point to 2007 as proof. In the year that large-cap and growth outperformed small-cap and value, fundamentally weighted indexes did not fare so well in comparison with cap-weighted indexes. In particular, dividend-weighted strategies seem to have been hit the hardest on the domestic front; the Dow Jones U.S. Select Dividend Index, for example, was down 5.16% in 2007, while the S&P 500 was up 5.49%. That's a difference in performance of nearly 1,000 basis points.

In this comparison, we examine large-cap and small-cap domestic ETFs as well as international ones from WisdomTree (WSDT.PK) and PowerShares in comparison with other cap-weighted ETFs.