Morningstar Advisor - August/September 2011 - (Page 51)

with, for example, the sector ETFs and fixed income. Is that arguably too narrow? McNabb: One of the reasons that we went a somewhere else, I wouldn’t say it’s that appropriate for them. Flanagan: Well, it’s probably no different than following benchmarks, right? It’s a rules-based investment approach. I think there’s something very attractive to that to a number of investors. Culloton: And Bill, is fundamental indexing little more granular on the fixed-income side than you might have anticipated is we’re concerned—I don’t know if concerned is too strong a word. But the nature of the fixedincome markets has changed quite a bit. Look at the total bond market right now—the composition of the Barclays Aggregate Bond Index versus its composition three or four years ago is dramatically different. Our view was that advisors might want to put fixed-income portfolios together a little bit differently than the broad total market, given how much intervention there’s been. We see enough sophistication among that clientele and among our institutional investors for that to make sense. For the average small investor who was buying an ETF through a brokerage platform at Vanguard or at Schwab or Fundamental Issues Culloton: Marty, there’s a lot of debate over whether fundamental indexing should be called “indexing” in general, because of the construction and the methodology behind it. Should it be called indexing? Flanagan: I hope so. (laughter) Flanagan: If you look at the range from passive to active, there is that spectrum. My view is that we are meeting investment needs with the fundamental indexes. And we think there’s a role; we think it is a very good thing in the portfolio. Culloton: Regardless of the vehicle, is fundamental indexing an index, or is there an active factor? McNabb: To me, indexing is matching a clearly defined, market-cap-weighted broad market or a market segment that’s clearly defined. There’s another really important element to this, and it’s what indexing means to the investor. The reason indexing is such a powerful, powerful argument is the cost differential. And it’s essentially that there is a zero-sum game going on here. McNabb: I’ve got to respectfully take the other side of the argument. actually indexing? IF YOU’RE THINKING OF WAYS TO GROW YOUR ADVISORY BUSINESS, THINK SCOTTRADE ADVISOR SERVICES. Scottrade Advisor Services delivers the tools and resources advisors like you need to run your business, your way: • No matter the number of assets under management, you can rely on a team that has extensive knowledge of Scottrade to deliver first-class service. • Scottrade Advisor Services provides you with a dedicated relationship team that gets to know you and your business. • Whether it’s your personalized team or a branch office, all Scottrade services are focused on helping your business grow, without competing for your clients. To find out more about how Scottrade Advisor Services can support your independent business, visit advisor.scottrade.com or call (866) 306-7135. Brokerage Products and Services offered by Scottrade, Inc. Member FINRA/SIPC. MorningstarAdvisor.com 51 http://advisor.scottrade.com http://advisor.scottrade.com http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011

Morningstar Advisor - August/September 2011
Contents
Contributors
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Small-Cap/Large-Cap Flip-Flop?
Four Picks for the Present
Investment Briefs
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?

Morningstar Advisor - August/September 2011