Tuesday, October 03, 2006

Fundamental Indexes & ETFs

Release the hounds! The hunt for positive alpha [or avoidance of negative alpha]).

I have just finished watching a presentation to the Toronto CFA society by Robert Arnott, Chairman of Research Affiliates. For anyone wanting a complete 60 minute education on new fundamental ETFs and indexes, I suggest that that you link up and watch the following two segments (only if you have broadband access however):

Claymore Investments 1
Claymore Investments 2

Mr. Arnott has many fascinating things to say, and many fascinating Power Point slides, all of which reinforce the superiority of fundamental indexing. For those in doubt, or those who'd just like to know more, I highly suggest this presentation.

Just one of the little nuggets he throws out there (and there are indeed, many), is that simply investing in the S&P 490 (don't invest in the 10 biggest S&P companies), would have produced an average outperformance over the S&P 500 (over the last 80 years), of about 55 to 60 basis points annually.

Even if you're a believer in the strength of fundamental indexes, as I am, there's still lots of good stuff here. Visit once, and you might be on your way to investing products from three of the larger fundamental ETF providers (Power Shares, Wisdom Tree, Claymore [USA or Canada]). Any strategy that produces 200+ basis points better annually than a conventional index, with lower risk, certainly gets my attention!

The one other fascinating thing to me, is the potential for these fundamental indexes to get a short-term boost over their usual outperformance, as more and more capital begins flowing into these companies over the next decade or so. I suspect the outperformance will be even starker over the next while, as this phenomenon unfolds.

John Bogle, thanks for the ride, but move over, the next great investment train is arriving!


The Confused Capitalist

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