As indexing grows, the weighting debate is attracting ever more attention.
Is the market's current allocation of capital, stock by stock and bond by bond,
the only real starting point for passive investing? According to Vanguard's Charles Thomas and Don Bennyhoff, the best index is not necessarily one that provides the highest return over a given period, but the one that most accurately measures the collective capital invested within the market being tracked. Anything else is active management, says Vanguard, and should be recognised as such.

Not so, argue Joost van Beek and Loes van der Padt of Kempen Capital Management, who have researched a variant of fundamental indexation for use specifically within the real estate market. There's a valid place for analysing and then selecting listed property companies for index inclusion on the basis of fundamental economic measures, say the two Kempen authors. By doing this, you outperform cap-weighting in most market environments.

I can see valid points in both these arguments. But it's clear that the lines between passive and active investing are becoming ever more blurred, and we're already seeing an acceleration of index development in areas that were historically the domain of hedge funds. At the same time, most passively invested assets continue to track traditional index variants.

So analysing index approaches is becoming ever more complicated, but it's an important subject and a challenge we're keen to take on with the Journal of Indexes Europe. Our next issue will address factor indexing, a closely related topic.

This issue also includes contributions from Robert Dubois, who looks at the major implications for financial markets of the loss of government bonds' risk-free status, and from Ronald Slivka, Yikai Zhang and Wenwen Zhang on index arbitrage in the Chinese equity market. Both articles are of importance not just for index investors and practitioners, but also for those interested in the theory of finance.

There's plenty of interesting news to report this issue: exchange mergers are being followed by those of index providers, while the ETF regulatory debate in Europe is hotting up. Read pages 34-39 to find out more.

Paul Amery
Editor