September 07, 2007

I had not caught the FTSE RAFI ad in the Wall Street Journal. That sounds like a RAFI in conjunction with a PowerShares ad to me. What did the small print say?

We just can't get enough of that fundamental indexation debate, can we? Can we CALL it fundamental indexation ... only referring to FTSE RAFI indexes, apparently if you want to avoid a quick legal notice from Rob's team. It's odd then, that WisdomTree manages to say "fundamental indexation" in relation to its dividend- and earnings-weighted ETFs about 10 times a paragraph.

Indeed, go back into the transcript of the great Arnott, Sauter and Siegel debate that we are running in the current issue of the Journal of Indexes and you'd be convinced that Jeremy Siegel was trying to bait Rob into a tirade. Fortunately, miraculously, Rob did not jump to it. But you could cut the consternation from Rob's side with a knife.

So with all of this testiness around the issue, there must be something around all this, right? I mean, where there is legal smoke, there must be big performance and asset-raising fire. Well, you can find out in the next version of Institutional Investor's ETF Guide. I have just completed an article giving the alternatively weighted indexes their first tentative grade card. We've really only just had enough real track record on a lot of these funds to be able to make any assessment at all.

And what is the verdict? Well first of all, many of these funds might have done better to launch 3 or 4 years ago and not in the last year or two. The simple fact is, as Matt illustrates in his current blog, style diversification benefit is BACK. Unfortunately for "fundamental" investors, value seems to be on the wrong side of that diversification benefit right now. And most of these alternatively weighted products have a decidedly value (and sometimes small) tilt. So where those bets go, these products go, and in the last few months, that has been down mostly.

If you have not clicked on the link to the debate above and are anything at all of an industry geek, go there now and read it ... it is highly entertaining, and all three participants contribute extremely salient points. I've seen a lot of these debates in the last 3 years, and this is as good a debate as I've seen. And we did it on a teleconference call.

So keep an eye out for the Institutional Investor piece. We'll ultimately publish some version of the same analysis in JoI or on the Web site too. It's an irresistible debate for industry people, because it manages to cut to the core of a lot of the issues around indexing without being intelligible to most of the outside world. It's like the political snubbing and gamesmanship that goes on in Washington.  And running an ad as really what is an inside joke is something aimed at and around the industry. It only takes a handful to make a sea change around institutional money management, for example.

Whether or not any of that happens will be due in part to luck. Because mainly it comes down to the bottom-line performance ... and the willingness or ability of people who have placed bets on one view to ride it out. It's all healthy and ultimately, I think these debates, though they may confuse some people, will likely lead to improvements in indexing, much as the move to free float did.

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