Editor's Note
By Jim Wiandt

Haiku-mania

The rabble-rousers in the ETF business are at it again. From every quarter, we are being bombarded with innovative new funds of every shape and size, from plain vanilla index funds (OK, not so many of those) to enhanced, quantitative and otherwise super-charged (or not) funds that are, for all intents and purposes, actively managed products.

But really, nothing has caused as much turbulence as the new class of alternatively weighted funds. For our patron saint, John C. Bogle, these funds appear to be the straw that broke the camel's back. He seemed to be tolerating "Now you can trade the S&P 500 in real time all day long" with a grimace, but now, with some of the steadfast cap-weighted indexers seemingly abandoning ship for what he perceives as a payday, what little grace had been given to ETFs has been rescinded.

Frankly, we can't get enough of the debate. Ultimately, you've got to think that when everything is examined in the harsh light of real-time returns, the truth, like cream, will rise to the top. Why? Because the numbers, when they're attached to real assets, do not lie. And we'll be looking at every basis point as the story unfolds.

To me, the whole debate about potential market mispricing is reminiscent of the great free-float debates of the late-1990s/early-2000s. And we know how that came out. The difference here is that there are no liquidity issues. The alternative-weighting crowd is essentially saying that the market is getting it wrong. And in our world, that's a little like saying that Siddhartha Gautama was really not such a nice guy after all.

We'd like to give a special thanks to Mr. Bogle for contributing his latest searing commentary about alternative weighting from his just-now published book, The Little Book of Common Sense Investing. In his honor, we'll be having a competition … and we know how you all love those … and awarding five lucky readers with signed copies of the new tome. Your task? To write a haiku about Mr. Bogle. Here's my offering, in case you don't know (or don't remember) what a haiku is:

Bogle was the first
They called him a communist
But now he's quite rich

This issue, as always, we've opened our pages to all sides of the debate. While Rob Arnott will not be making an appearance, we do have offerings from Vincent Lowry, who makes the case for revenue weighting (Fortune 500 anyone?), while Ron Hylton weighs in with an interesting analysis of what he sees as the juice behind the new methodologies—isolating volatility. And wait 'til you hear what Eugene Fama and Kenneth French have to say about these nouveau indexers; we've got a live-wire interview with the "fathers of the three-factor model."

Back in the land of tried-and-true cap-weighted indexing, John Haslem takes a look at all available S&P 500 mutual funds and shows us how expense ratios correlate with performance (or not). Anchoring the issue is David Blitzer, who offers some disquieting words on liquidity, and the Curmudgeon, who brings us home with a lampoon about the future state of the exchanges vis-à-vis ETFs.

So it turns out that we've got a jam-packed issue that should provide more than enough punch to keep you awake on that Metro North train home.

Jim Wiandt
Editor