'Godfather' of Fundamental Indexing Faces Challenge
A year ago this week, when WisdomTree Investments (WSDT ) launched its first 20 exchange-traded funds, it threw down the gauntlet in the rarified world of indexing.
At the time, it was the largest number of ETFs tracking indices based on fundamental criteria -- primarily dividends -- rather than stock prices.
It was also a challenge to Rob Arnott, the godfather of fundamental indexing. Arnott's investment firm, Research Affiliates, had licensed the first ETF based on a fundamental index a year earlier and filed a patent application for all indices based on fundamentals.
But WisdomTree didn't seek Arnott's blessing for its new products. In essence, the firm was saying that fundamentally weighted indexing isn't the property of Research Affiliates but of the entire world.Typical indices weight companies according to their stock market valuation, also known as market capitalization. This value is calculated by multiplying the total number of outstanding shares by the stock's price. The criteria give a greater weighting to large companies and higher-priced stocks over small companies and lower-priced stocks. It's the basis for the S&P 500 and most other market benchmarks. The theory behind fundamental indexing is that market-cap-weighted indices were overweighted with overpriced stocks, while fundamentally-weighted indices captured better returns with lower volatility. WisdomTree promoted the new ETFs with a splashy marketing campaign, including newspaper and TV ads featuring endorsements from two of its famous backers, legendary hedge-fund manager Michael Steinhardt and Wharton finance professor Jeremy Siegel. But the highlight of the marketing blitz was an opinion piece on The Wall Street Journal's op-ed page in which Siegel lobbed a grenade at the "efficient-market theory," the philosophical foundation for the market-cap indices.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV