Fundamentally Weighted Indexes

[10/9/06] Jeremy Siegel writes about fundamentally weighted indexes, "we are on the verge of a revolution: New research demonstrates that it is possible to construct broad-based indexes offering investors better returns and lower volatility than capitalization-weighted indexes. These indexes are weighted by fundamental measures of firm value, such as sales or dividends, instead of allowing the market price alone to dictate how much of each firm should be included in the index."

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[from John Mauldin's Thoughts From The Frontline]

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if every asset is trading above or below its true fair value, then any index that is capitalization-weighted (price-weighted or valuation-weighted) is automatically going to have us overexposed to every single asset that's trading above its true fair value and underexposed to every single asset that's trading below its true fair value.

[Read that again. This is one of the reasons why value investing beats indexing over the long term.]

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In addition to PowerShares mentioned in the article. Jeremy Siegel was talking about these new fundamentally weighted ETFs on CNBC which served practically as a free commercial for Wisdom Tree a firm with which he has signed on as an advisor.

Disclaimer: I (currently) own no investments in either PowerShares or Wisdom Tree.