Is There A Better Way For Index Investors?

Is there a better way for investors to index their portfolios?

A bitter fight is breaking out over just that question.

In one corner sits John Bogle, founder of the Vanguard Group. He believes that index funds should hold stocks in proportion to each stock’s market capitalization – the market value of all the company’s shares.

In the opposite corner sits Rob Arnott, who co-authored The Fundamental Index: A Better Way To Invest, with Jason Hsu and John West. They believe that indexes should ignore market caps and hold companies in proportion to each firm’s fundamentals – things like cash flow or book value.

The spat between Mr. Bogle and Mr. Arnott may sound like an academic debate, but the outcome could have a large effect on your portfolio results.

Please read the rest of the article at The Globe and Mail

no one has more first hand experience helping expat investors

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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27 Responses

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  2. Justin Bulger says:

    Hi Andrew,

    I just recently read your book and I really enjoyed it. I am currently a young supply teacher and am hoping to follow in your footsteps. What is your opinion on fundamental index funds vs. market-cap index funds? This article is obviously pro fundamental funds but is the research that conclusive that they are better overall?

    Thanks for the response,


    • Hi Justin,

      Well, as I explained in the article, the evidence does seem to point in that direction. And as mentioned, I am adding them to my portfolio, but not selling what I have to do so. I do recommend the book mentioned in the article–fascinating stuff. And if my fundamental indexes outperform over the next five years, as mentioned, I will be making the switch.

  3. Why not equal weighted ETFs? If I was to invest in Royal Bank and National Bank, I wouldn't likely buy 80 shares of Royal Bank for every 10 shares of National Bank. I would likely buy 45 shares of each. It's simple, doesn't require complicated or interpreted calculations, and potentially lets you gain exposure to smaller companies in a diversified manner.

    • That certainly does make sense, Canadian Dividend Blogger. But such an index would have a much greater small cap weighting than anything other than a specific small cap index. To weight Johnson & Johnson the same as Papa John's Pizza seems a bit odd….but then again, the index won't likely fall victim to the overvaluation that cap based indexes do, in this case. That said, it would be nearly as volatile as a small cap index and many investors would dislike that. I would personally prefer a fundamentally weighted index than one that was equally weighted.

    • The research seems to show that equal-weighted indexes do indeed outperform traditional ones – but a fundamental index that uses some other form of weighting can do even better. Equal weighting also seems to generate more transaction costs since any rise or fall in a stock price relative to the market will require trading.

      I do use an equally-weighted index for Canadian REITs because there aren't that many of them but in most cases I would look for a fundamentally-weighted index instead. Like Andrew I have a portfolio that's in regular index funds but I'm looking at using new additions to build up a fundamental portion.

  4. Lee Atkinson says:

    Hi Andrew,

    I thought you might be interested to see that even the mainstream media here in the UK is finally waking up to Index Funds.

    A recent study has found that only 38% of managed funds beat their appropriate UK All Share Index over a 10 year period.

  5. Roger says:

    Hi Andrew

    I enjoyed reading this article. Even thought CRQ has outperformed XIU, it is even more concentrated in Financials and Energy than XIU and just as poorly diversified. Would the investor not be taking on extra risk in the hopes of better future returns? I am a new DIY investor and just trying to understand these new indexes. Any insight would be greatly appreciated.

    • That might be the case Roger. The Canadian market has always been a bit heavy in Financials and Energy. I hear much concern about this, but the bottom line is this: the Canadian market itself (despite this leaning) is no more volatile than the U.S. market. We have decades of history suggesting they are similar in volatility. And volatility itself–even if it was greater–doesn't necessarily mean greater risk. If you have a global portfolio of bonds, U.S. stocks and International stocks (via indexes) as well as a Canadian index, the concentration of that Canadian index in financials or energy doesn't necessarily mean that your globally diversified portfolio is skewed. The fundamental index will prevent stocks like Nortel (remember 1999?) taking a huge amount of the weighting because it's based on the economic footprint, and not on market cap. What do you think?

  6. Paul says:

    Andrew, when you buy the fundamental ETFs which are you likely to buy? The ones you mention in the article? Just US and EAFE?

  7. Kunwak says:

    Hi Andrew, what are your choices to replace VTI and VEA?

  8. Jonathan says:

    Hi Andrew, If I will replace my ISHG (World Bonds Index), VTI (US Index) and VEA, what is the best (and cheapest) ETF?

  9. Loydis says:

    Hi Andrew,

    There is an article about this subject that was written by John Bogle and Burton Malkiel back in June 2006. The article is call: Turn on a Paradigm. You can find it on google.

    Let me know what you think.


    • Stig says:

      Thanks for suggesting the article Loydis – a very interesting counter-argument.

      Andrew, I too am very curious about your response to the points raised by Bogle/Malkiel, especially in the context of the 5-year comparative results you presented (I like the comments about reversion to the mean and the line, "Never think you know more than the markets. Nobody does.")

      Here is a direct link to the WSJ article:


  10. Kelvin says:

    Hi Andrew

    You mentioned Claymore’s Canadian Fundamental ETF and Claymore’s U.S. Fundamental ETF as replacements but not really replacements for VTI and VEA? Could you validate?

    I am thinking of splitting my global equity portion 50:50 between a cap weighted and fundamental weighted for a start first.

    I believe the Singapore STI does not have fundamental weighted versions, right?



  11. Daniel says:

    Interesting post. I'll be following your blog to see if you ultimately decide it is worth it to go with the fundamental indexes. Their higher MER fees are going to be the deciding factor. . how much those will eat into your profit.

  12. Stig says:

    Speaking of fees on fundamental indexes, iShares just released a new value-weighted ETF (broad US market), with fees of only .15.

    Ticker symbol is VLUE.

  13. Jeannie says:

    Hi Andrew,

    Very interesting article. I did some research after reading this. It seems like tracking error, higher MER and tax efficiency (I'm Canadian) are the main concerns with fundamental indexes right now. Personally, I feel like there are not enough products in this category or they are too new (Correct me if I'm wrong). It will be interesting to be how the opinions might change in the next few years.

    Side note: I have just finished your book yesterday. Great job! To me, it's a excellent blend of entertaining and informative.

    • Thanks Jeannie,

      I find the tracking error argument a bit bizarre. I too, have read that from one source. The article in question made it look like the tracking error caused underperformance, versus cap-weighted index equivalents. But….the bottom line is that after tracking errors, after expense ratios and even after the taxable costs, fundamental indexes have outperformed cap-weighted products. I think that should be the only benchmark worth considering. Will they continue to, in the future? I don't know. But if you want to do some in-depth reseach, I recommend the book I highlighted in the article.



  14. Fraussie says:

    Hi Andrew

    In the article you say “I won’t be switching my personal portfolio to fundamental indexes yet, but I will start adding them to my portfolio. If they outperform my cap-weighted indexes over the next five years, then I’ll likely be making the switch.”

    I am keen to do the same ie. build a portfolio with a bit of fundamental in it and progressively grow the fundamental part of it as we get more visibility of those ETFs. Assuming I have 25-30% short term bonds ETF and the 70-75% shares ETF, how much fundamental shares ETF would you advise to have?

  15. Aravind Sithamparapillai says:

    Hello Andrew!

    You mentioned you would be looking at fundamental indexes slowly over a 5 year period (which we are coming up on) and would determine outperformance then. I am curious, how have they been doing and is there a viable reason to make that switch or at least incorporate them into investing overall?

    Also – this might be a dumb question but as a novice investor using Virtual Brokers with a TFSA I haven’t really given a lot of thought to properly tracking my returns but I would like to in order to compare them to my Financial Advisor as I have some money with him as well and would love to see an apples to apples comparison to hold him accountable.

    • Hi Aravind,

      Results from fundamental indexes have been mixed over the past five years. With some country ETFs, they have edged ahead. With others, they have lagged. Overall, I did an assessment on a U.S. portfolio recently, and the cap-weighted couch potato performed about as well as its fundamental equivalent over the past 10-year period. As for performance tracking, most brokerages will now do this for you. QTrade and RBC Action Direct, as well as TD (to name three examples) do a great job tracking your performance, annually and cumulatively, while allowing you to compare to different equal dollar-weighted benchmarks. I haven’t tried Virtual Brokers before, so I don’t know if they track performance.


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