Matt Hougan and Jim Wiandt write daily blogs on IndexUniverse.com. These blogs often feature biting disagreements that get to the heart of key investing issues and, according to Matt and Jim, are must-reading for anyone who wants to stay current on indexing and ETFs.

Jim Wiandt, editor, Journal of Indexes (Wiandt): Matt, I know I’ve called you many things in the blogs—Chicken Little, a market-timer and a little girl, among other things. I want to put all of that behind us and give you a chance to truly demonstrate your mettle and your wisdom. Here’s my question to you: As an active investor, how do you feel about ETFs making up 30%-40% of equity trading volume, “quantitative” and “fundamental” indices, stylized new “asset classes” and the rest?

Matt Hougan, editor, IndexUniverse.com (Hougan): Let’s get things straight, Jim. You can call me whatever you want, but what you should call me is “right.” Your Chicken Little epithet came in August 2007, when I predicted that national real estate prices would fall as much as 30%. You called it “hard to imagine.” As of Q3 2008, national home prices were down 26% from their peak, and heading lower. Chicken Little? How about Mr. Right?

As for the blurring of the lines between active and passive, you know how I feel. My investing style is as boring as dirt, but I love writing about this stuff, so the more product innovation the better. I’ll add that I think the new long-short commodity funds are very interesting. I know you’re going to jump up and down on that one, but we can’t let bluster get in the way of truth.

Wiandt: How about instead of calling you “Mr. Right,” we go with “Mr. Light,” as in light on the facts, long on the wind. You’ve been dancing on the grave of the real estate market for six months now. So jump for joy; I know you’ll still be hollering about it in five years—every dog does have its day. Ease off, though, on the party honkers while grandma gets evicted from her house and the global economy heads straight for the apocalypse.

Oh wise one, can you bring out your crystal ball and tell everyone what we’re in for in 2009? Since you are the master marker of markets, surely you’ll know. Real estate creeps up, oil continues to trickle down, unemployment is up, and the dollar is down? I know you’ve already called the market floor. Tell us, Mr. Light.

Hougan: How about this? Indexing will beat active. Costs will matter. And ETFs will take market share from the mutual fund industry.

Oh, and one more thing: The Celtics will crush your unidimensional Cavaliers to win the Championship.

Wiandt: You mean the same Boston Celtics that the Cavs just thrashed this month? Those Boston Celtics? Enjoy last year’s Victory of the Old Men, Mr. Hougan, and brace yourself for dynasty. We are all witnesses. On the rest, I’m glad to see an active investor (long/short commodities indeed!) make the only sense he has in this whole thread. Mr. Bogle, I’m sure, is proud right now of this one child who’d gone astray.

Hougan: As the saying goes, Jim, “Judge not lest ye be judged.” And as the other saying goes, “Put your money where your mouth is.”

I’ve noticed a big gap open up between what you say and what you do in the market. You say you love indexing, but you’ve owned General Motors common stock since 1972. You say you love asset allocation, but you’ve never owned a bond in your life. You say you’re not a market-timer, but you snapped up shares of XLF (the Financials ETF) in October 2008. By my calculation, you’re down about 30% on the trade. Oops!

At least you talk a good game, though. Kind of like the Cavaliers.

[For more Matt and Jim, check out http://www.indexuniverse.com/index.php.]