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Evolution of Indexing

A trip to an industry event offers insight into what's in the pipeline.

There's a joke that if you can't find the idiot in the room, it's probably you. I had a somewhat similar feeling on my trip to the Super Bowl of Indexing in Phoenix.

The featured event was a celebrity death match between Wharton professor Jeremy Siegel and Princeton professor Burton Malkiel.

Siegel believes that indexing has evolved so that the biases of cap-weighting (i.e., a tilt to larger growth) can be mitigated with fundamental indexing. Professor Malkiel believes that while fundamental indexing has been a hotspot in the past few years, he is concerned that it cannot continue to outperform; he noted that fundamental indexing has a bias to smaller value. Malkiel also cited some research that points to growth rotating back into favor.

My first meeting was with WisdomTree, which wants to be a big player in the industry, and I believe it will be. It's interested in exploring fixed income in a meaningful way, and we discussed the idea of an equity exchange-traded fund that covered the Nordics, including Iceland. We also talked about the logic of the N-11 (Mexico, Korea, Bangladesh, Egypt, Indonesia, Iran, Nigeria, Pakistan, the Philippines, Turkey and Vietnam) as a logical place for a future product, but a frontier ETF is probably a while away.

I spent quite a bit of time with the folks from Claymore. The

Oil Up



Oil Down


Macroshares are interesting. They capture the movement of oil without having to manage any oil contracts.

I also had a one-on-one sitdown with the man who designed the Claymore Patent ETF, which will trade under the ticker OTP. I don't have an opinion yet, but studying it is not a waste. The Patent ETF methodology values companies by assessing the financial worth of a company's patent portfolio, believing that the better patents a company owns, the better the stock will do. The back-test obviously supports the thesis. But the fact that I needed 10 minutes of face time with the designer of the index to understand it may explain why the fund may not be popular.

I had a very quick chat with someone from the Chicago Board Options Exchange. I asked if anyone was interested in making an ETF out of its buy-write indices. There is interest, but that's about all that the representative could say. Unfortunately, the CBOE booth was not getting a lot of traffic, so I'm not sure there will be enough interest to make investible products around these, but I hope so.

I stopped by the FTSE booth and found one interesting item coming: the FTSE Macquarie Global Infrastructure Index, which will be an ETF, possibly as soon as next quarter. I have written about and disclosed owning the

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Macquarie Trust


, which is not an indexed product. Macquarie has a bunch of infrastructure indices, including Australia, Europe and Japan. I'm a big believer in this niche that Macquarie has created, and while I like MIC for now, at about a 3% weight, I would swap into something else from it if I felt it was superior.

One of my more interesting visits was with the people from MSCI/Barra. Many of my readers have commented about fixed-income ETFs. Well, MSCI/Barra has all the indices that the entire industry will ever need. (Well, this may be hyperbole, but it does have a lot of them!)

When it comes to bonds, I don't feel the need to get too exotic. I would be thrilled to have access to sovereign debt from other countries. MSCI/Barra has indices from all the big countries, along with places like Hungary and South Africa. Maintaining indices of government bonds is not a huge obstacle like foreign corporates could be. I tend to think that where foreign bonds are concerned, it is more about capturing general effect than every last basis point.

My last big visit was with Rydex. The Yen ETF is in registration and will probably round out its product line. Rydex also has an ETF based on a credit default swap index (CDX) somewhere in the process. When I asked about a VIX ETF and confessed I wasn't sure how it would work, the representative laid it all out in about two seconds, which makes me think some thought has already been devoted to the idea. The potential applications for VIX and CDX ETFs would be very sophisticated and something I need to learn more about.

One very unique thing about Rydex is the total package view it takes on all of its products. Every product it introduces has to be able to tie in with its use of Modern Portfolio Theory, something it calls

Essential Portfolio Theory.

The strangest part of my experience at the conference was that no one was manning the iShares booth or the State Street ETF booth the entire time.

One last note about the list of ETFs that readers asked for: Many of them are in the works, and a few of them already exist. I got a few reactions from company representatives like "Hey, we already have that!" To that, I replied that if people don't know about it, it does not exist.

At the time of publication, Nusbaum was long Macquarie Trust, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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