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Getting Index Weighting Straight

The argument over cap-weighted indexing vs. fundamental indexing rages on. And with the plethora of ETFs available employing either one, the debate appears to be an important one. However, most articles seem to add very little new information, leaving the central question yet to be addressed: Should you care?

Over the weekend, an article in The New York Times ably demonstrated what I'm talking about.

Indexing pioneer Jack Bogle is always quoted as saying something very negative, Jeremy Siegel and Robert Arnott are always quoted as saying something positive, but, of course, all three have some vested interest in their respective arguments. Bogle might be defending his legacy, and Siegel and Arnott are involved with investment products that fundamentally weight stocks into various indices.

As a quick primer, Bogle believes that weighting indices by market cap is the only way to go; other ideas tend to be faddish. Fundamental indexing constructs indices, and it weights the constituents using some sort of fundamental measure or blend of different fundamentals. Fundamental indexing is very new to the investing mainstream, whereas market-cap weighting is an old standby.

One luminary often quoted in these debates with seemingly no vested interest might be Burton Malkiel. He sides with Bogle, believing that cap weighting is the better way to go.

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