Jeremy Siegel is well-known in indexing circles as one of the early promoters of alternatively weighted indexes, particularly dividend-weighted ones. He is, after all, WisdomTree Investments’ senior strategy advisor and owns a 2 percent stake in the company. But The Wharton School professor was an investment guru in his own right long before WisdomTree launched its first ETF, publishing the iconic investment book “Stocks For The Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies” in 1994; it’s now in its fifth edition. He also publishes a weekly newsletter and appears regularly in the financial media.
What do you see as the biggest positive or negative development in the indexing space in the past 20 years or so?
Well, very definitely I think the biggest positive has been the development of intelligent indexing or fundamentally weighted indexing, particularly fundamentally weighted indexing. That has changed the conversation and that itself is a breakthrough on the order of the index fund that Jack Bogle started nearly 40 years ago.
Has indexing hit critical mass or do you think it still has a ways to go before it can be considered a rather mainstream strategy?
The trend towards indexing is nowhere near over. We are increasingly seeing evidence that confirms that active managers, after their fees, underperform the indexes. And there is still much more money in nonindexing than there is in indexing, so I don’t think we’ve seen the peak of indexing.
Now, I’m not saying we haven’t seen the peak of indexing products, although there will always be innovation, but in terms of dollar flow, I still think you’re going to see healthy flows from the nonindexed to the indexed world.
Will ETFs replace or overshadow mutual funds eventually?
Yes, I believe they will. There are a number of things that lead me to believe that. First of all, ETFs are very well designed for the indexing space. I think they will continue to grow. They have tax advantages and the flexibility that people want when managing their money. Investors want to be able to sell and buy when they want. They don’t want to get letters from their mutual fund companies indicating they are restricted to one or two transactions per month or per year. That drive for transaction freedom will continue.
It is important that index funds remain competitive in their fee structure. So just calling yourself an index fund is not any guarantee you’re going to be successful unless you’ve got a very competitive product.
How would you say that ETFs have changed the indexing industry?
ETFs have changed the indexing industry by allowing flexibility. And I think that is a very, very important motivation. Also, again, they are tax advantaged relative to almost all mutual funds. That is also very beneficial. But I think the flexibility is the most important feature of ETFs. You don’t need permission from your mutual fund to do more than a certain number of transactions. That is the big downside to the standard mutual fund.
Smart beta is one of the buzzwords flying around the indexing industry right now. What do you see ahead for it?
As a supporter of fundamentally weighted indexing, I see a strong trend to use those factors that historically have allowed investors to outperform capitalization-weighted indexes. I wouldn’t be surprised to see as much as 50 percent of all indexing assets under management to eventually flow to the so-called smart indexing strategies.