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.”