Comments on: The Lure of Fundamentally Weighted ETFs http://www.investorgeeks.com/articles/2007/07/10/the-lure-of-fundamentally-weighted-etfs/ Learning and sharing investment knowledge. Thu, 17 Mar 2011 02:30:53 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Parker Bohn http://www.investorgeeks.com/articles/2007/07/10/the-lure-of-fundamentally-weighted-etfs/#comment-1118901 Parker Bohn Fri, 04 Mar 2011 12:41:32 +0000 http://www.investorgeeks.com/articles/2007/07/10/the-lure-of-fundamentally-weighted-etfs/#comment-1118901 I am a fan of Wisdomtree as well. This explanation is well-written, but contains one critical over-sight. Dividend weighted ETFs are not weighted based on the dividend yield, but on the absolute amount of dividends paid. For example, if Microsoft (a huge company) has a lower yield than a smaller company, it may still have a higher weighting in the ETF, since it pays more total dividends. In a way, this ETF strategy still weights the largest companies the highest, it just decides on company size based on total dividend payout, instead of market cap. I am a fan of Wisdomtree as well.

This explanation is well-written, but contains one critical over-sight.

Dividend weighted ETFs are not weighted based on the dividend yield, but on the absolute amount of dividends paid. For example, if Microsoft (a huge company) has a lower yield than a smaller company, it may still have a higher weighting in the ETF, since it pays more total dividends.

In a way, this ETF strategy still weights the largest companies the highest, it just decides on company size based on total dividend payout, instead of market cap.

]]> By: Mikey http://www.investorgeeks.com/articles/2007/07/10/the-lure-of-fundamentally-weighted-etfs/#comment-856476 Mikey Mon, 25 May 2009 09:06:19 +0000 http://www.investorgeeks.com/articles/2007/07/10/the-lure-of-fundamentally-weighted-etfs/#comment-856476 You are only partially correct in your disliking mutual funds. It is certainly true that a fund will buy an expensive stock at high prices (Yahoo is a great example of over pricing for a new listing that S&P 500 funds had to buy). However they only sell the stock when people take their money out. Think about it, as the price falls so does it percentage holding (Due to the price drop). A cap weighted fund only buys and sells when customers want to make new investements or draw out previous investments. Thats the beauty of them. The downside is that as you hold more of the most expensive companies you are likely, almost certain, to miss out on the largest winners. I think there is certainly a good place for ETFs in the market. What I am somewhat concerened about with any of these managed ETFs the need to buy and sell stocks whenever a fundamental weighting changes (Every buy and sell cycle - so often once per year) is the tax hit I would take. I like ETFs but I want to see some proof of out performance of an index before I go and put a lot of money in the. My favorite is still a med cap cap weighted index tracker. S&P400 or in my country (UK) FTSE 250, though these are very rare so FTSE All-Share trackers. You are only partially correct in your disliking mutual funds. It is certainly true that a fund will buy an expensive stock at high prices (Yahoo is a great example of over pricing for a new listing that S&P 500 funds had to buy). However they only sell the stock when people take their money out.
Think about it, as the price falls so does it percentage holding (Due to the price drop). A cap weighted fund only buys and sells when customers want to make new investements or draw out previous investments. Thats the beauty of them. The downside is that as you hold more of the most expensive companies you are likely, almost certain, to miss out on the largest winners.
I think there is certainly a good place for ETFs in the market. What I am somewhat concerened about with any of these managed ETFs the need to buy and sell stocks whenever a fundamental weighting changes (Every buy and sell cycle – so often once per year) is the tax hit I would take.
I like ETFs but I want to see some proof of out performance of an index before I go and put a lot of money in the.

My favorite is still a med cap cap weighted index tracker. S&P400 or in my country (UK) FTSE 250, though these are very rare so FTSE All-Share trackers.

]]> By: ETF Guy http://www.investorgeeks.com/articles/2007/07/10/the-lure-of-fundamentally-weighted-etfs/#comment-137025 ETF Guy Sat, 11 Aug 2007 03:06:39 +0000 http://www.investorgeeks.com/articles/2007/07/10/the-lure-of-fundamentally-weighted-etfs/#comment-137025 I think that using the S&P 500 to compare cap-weighted ETFs and fundamental-weighted ETFs doesn't show the full picture. The S&P includes some mega-caps that certainly do significantly skew the holdings as you described. But as soon as you step in to a mid-cap ETF that tracks the S&P 400 the skew isn't nearly as great -- the top 10 holdings represent only 7.5% of the fund. I imagine this debate will rage on for many more years! I think that using the S&P 500 to compare cap-weighted ETFs and fundamental-weighted ETFs doesn’t show the full picture. The S&P includes some mega-caps that certainly do significantly skew the holdings as you described. But as soon as you step in to a mid-cap ETF that tracks the S&P 400 the skew isn’t nearly as great — the top 10 holdings represent only 7.5% of the fund.

I imagine this debate will rage on for many more years!

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