Levered ETF Math

Many people use levered ETFs to either leverage (i.e. double) or hedge their exposure to an index Unfortunately, their results can often differ from what they expect. This Wall Street Journal gives a good explanation why in this article. It's a good illustration how volatility makes geometric and arithmetic averages differ.

More On Fundamental Indexing

In doing a bit of preparation for this week's classes (it's mutual fund week in my investments class) I came across a resource called The Journal of Indexes - put out by Indexuniverse.com. It has a wealth of information on indexing and index funds, and is well worth a look see.

To whet your appetite, here's a piece from the journal on "fundamental indexing", which I've blogged about before (i.e. here, and here). In case you're unfamiliar with the term, a "fundamental" index is one where the individual stocks in the index are weighted based on some "fundamental" factor, like cash flow, dividends, revenue, or profits. So in one sense, they're the close relatives to market capitalization-weighted (instead of weighting by market cap, they weight by dividends, sales profits, etc...). Proponents of fundamental indexing claim that cap-weighted indexes over-represent companies that have grown rapidly and are therefore likely to be overvalued. So, their reasoning for "fundamental" indexing is that it corrects some of this supposed mis-weighting.

The article, titled "Fundamental Indexing Smackdown", consists of discussions between two proponents of fundamental indexes (Rob Arnott and Jeremy Siegel) and one sceptic and promoter of traditional mcap-weighted indexes (Gus Sauter).

The three commenters are among the biggest dogs in the indexing pack, so the article is (not surprisingly) a pretty good one. Enjoy.