WisdomTree, a new provider of ETFs has launched 20 new ETFs based on proprietary, fundamental indices. Most of these new ETFs represent asset classes for which (as far as I know) dividend ETFs were not available: a MidCap Dividend ETF, a SmallCap Dividend ETF and a whole bunch of foreign dividend ETFs. Fees range from 0.28% to 0.58%.
Before you jump into these new-fangled investment products, you need to be aware of a lively debate between the proponents of fundamental indices and those of traditional market-capitalization weighted indices.
Prof. Jeremy Siegel, who is serving as an advisor for WisdomTree, suggests that a fundamental index based on dividends provides a way of avoiding some of the market noise inherent in traditional indices. WisdomTree also claims that back testing indicates that the firm’s six indices beat their comparable market-cap weighted indices for periods of 1964-2005, 1980-2005 and 1996-2005.
Prof. Burton Malkiel and Jack Bogle, founder of Vanguard, point out that fundamental indices are not without faults. For instance, stocks that do not pay a dividend are entirely excluded from WisdomTree’s indices. Traditional index funds also have lower costs and more importantly lower turnover. It should be added that at least initially, these new ETFs will be thinly traded and hence will sport high bid-ask spreads.
Fundamental indices may have a better risk and return profile but for now, I am going to follow Jack Bogle’s advice: “I know I will capture my fair share of the total market’s return if I own a market index fund. I don’t know whether these new paradigms will be better or whether they will be worse.”
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3 responses so far ↓
1 Alex Givant // Jun 30, 2006 at 7:09 am
Excellent interview with John (not Jack) Bogle
http://www.venturevoice.com/2006/02/vv_show_28_john_bogle_of_the_v.html#more
2 Canadian Capitalist // Jun 30, 2006 at 8:02 am
My apologies for getting the name wrong. But, I seem to remember reading Jack Bogle somewhere. Maybe I am mistaken
3 Vic Parker // Jul 1, 2006 at 3:07 pm
It does not surprise me that the new battle field is ETF. The average joe investors are flocking to ETF after they have waken up noticing the poor performance and high fees of mutual funds.
I think those create the latest and greatest (MF or ETF) should put their money where their mouths are. What the investing communities should demand is fees based on being right performance. The originator (WisdomTree directors etc) and advisors (Seigel) should put on transparent display that they have substantial of their net worth in it. So that we know their motive is in line with joe investors.
Note: I have never bought MF, I think it is a product to generate revenue out of joe investors for the brokers, not make money for joe investors.
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