Jeremy Siegel loves fundamentally weighted index funds
In yesterday's Wall Street Journal, Wharton prof Jeremy Seigel touted "fundamentally weighted" index funds and ETFs. For those interested in indexing, the efficient market hypothesis, stock fundamentals, and related topics, the entire article is worth a look, so by all means, fish a copy of the WSJ out of somebody's recycling or go have a look at the online edition if you subscribe electronically.
Siegel's interest in publishing this article is more than merely academic: he consults for Wisdom Tree Investments which is on the cusp of releasing some investment products that involve fundamental indexing. Though companies such as iShares, Vanguard, and Powershares have beaten Wisdom Tree out of the blocks with ETFs based on dividend indices, the diversity of Wisdom Tree's offerings should assist that company in differentiating its line. Russell Bailyn has more details on his blog, the look of which should spur me to finally do some design work on this page.
From Siegel's article:
Furthermore, dividend-weighted indexes had better risk and return characteristics than capitalization weighted indexes in each industrial sector and each country that I analyzed. Dividend-weighted indexes even outperformed "value cuts" of the popular capitalization-weighted indexes such as the Russell Value and Barra-S&P Value that attempt to choose those stocks whose prices are low relative to fundamentals.
With the advent of fundamental indexes, we're at the brink of a huge paradigm shift. The chinks in the armor of the efficient market hypothesis have grown too large to be ignored. No longer can advisers claim that capitalization-weighted indexes afford investors the best risk and return tradeoff. The noisy market hypothesis, which makes the simple yet convincing claim that the prices of securities often change in ways that are unrelated to fundamentals, is a much better description of reality and offers a simple explanation for why value-based investing beats the market.
If you are a fan of indexing, as I and so many other investors are, you are no longer trapped in capitalization weighted indexes which overweight overvalued stocks and underweight undervalued stocks. Devotees of value investing who are searching for a simple, low-cost indexed portfolio in which to hold their stocks need wait no longer. Fundamentally weighted indexes are the next wave of investing.