Comments on: Sample Portfolio of FTSE RAFI Funds versus Cap-Weighted ETFs

By: Preet

Preet — Fri, 23 Jan 2009 03:35:56 +0000

@ Jordan – thanks again! I hope you will consider writing an article for MY blog one day… :)

By: Jordan

Jordan — Fri, 23 Jan 2009 02:36:56 +0000

As a follow up to my own comment, I accidentally stumbled onto another quote by William Bernstein, this time a more favorable one at the bottom of this article on Fundamental Indexes in the NY Times:

William J. Bernstein, co-principal of the investment management firm Efficient Frontier, described fundamental investing this way: “It has higher turnover and higher transactional expenses, and so you have to be rewarded for that with extra return. And I think fundamental indexing does that.”

http://www.nytimes.com/2006/08/15/business/15place.html?_r=1

By: Preet

Preet — Thu, 15 Jan 2009 23:53:47 +0000

@Brian – thanks for the note. There are certainly both proponents and opponents to both cap weighting and fundamental indexation.

@Jordan – thanks for that great link. I had read it before and felt the same as you I think. Having said that, there seems to be a common misconception that RAFI is simply a value tilt – it is not. The tilt swings from value to growth and back as a result of how the metrics line up with current market conditions. I don’t know if anyone has looked at this in the frame of a three factor model, but I have some data from Research Affiliates which shows the dynamic tilt nature of RAFI – I’ll see if I can get permission to post it. Very interesting stuff.

By: Preet

Preet — Thu, 15 Jan 2009 23:41:54 +0000

@Scott – just to be clear, XIC and XIU are both cap weighted, it’s just that one has “capping” that prevents any one security from representing more that 10% of the fund. A smaller company may still trade at inflated P/Es.

By: Jordan

Jordan — Thu, 15 Jan 2009 22:18:57 +0000

Hey Brain, I wanted to know the same thing and William Bernstein actually wrote a little article on his site about fundamental indexes that is rather pessimistic/cautious about them.

http://www.efficientfrontier.com/ef/0adhoc/fi.htm

I was personally disappointed, if he had said they were great I think I’d be 100% in to them myself.

By: Brian

Brian — Thu, 15 Jan 2009 15:39:03 +0000

Preet,

These recient posts on fundamental indexing have introduced me to a whole new area of interest. Great timing, as I’m currently reading the Intelligent Asset Allocator. I wonder what William Bernstein would think of FI’s.

Keep up the great content!

By: Scott

Scott — Thu, 15 Jan 2009 14:21:44 +0000

Ok I’ve done some research. No need to reply to above.

By: Scott

Scott — Thu, 15 Jan 2009 14:08:00 +0000

Sorry I’m a bit new to this. For an individual investor, would this plot be reflected in a TSX composite ETF such as XIC vs. a TSX cap weighted index such as XIU? As a 30 year old I am interested in long term investments but don’t have the capital to diversify that much yet. Thanks.