Siegel, a professor at the Wharton School of the University of Pennsylvania and author of the classic investing book Stocks for the Long Run<
/i>, said he's found that a fundamental approach to indexing--weighting stocks based on metrics like book value, sales, profits, or dividends--is optimal for investors. "One very important point that has to be understood about cap-weighted indexing is that it is only optimal for investors under one circumstance: if the prices for all stocks are efficiently set," he said. "The more that I study the economy, the more I see cracks in the efficient market theory."
Sauter, chief investment officer and managing director for the Vanguard Group, countered that nontraditional indexing costs more, and that traditional index funds give investors a better chance of staying with the market. "The value of a market-cap-weighted index is that before costs investors are getting the market rate of return, because they own the market," he said. "After costs, most investors will get less than the market rate of return."
Sauter said that many investors dramatically underestimate transaction costs, meaning that in the end, a traditional index fund makes it more likely for investors to earn the market rate of return.
