The grim, grey editorial pages of the Wall Street Journal have become a field of glory, with flashing knives, slings and arrows, as famous academics battle to defend the besieged Efficient Market Hypothesis and the purity of Index Funds.

	The Battle of the Academics

In an editorial published on June 27, 2020, Burton G. Malkiel joined with John C. Bogle of the Vanguard Group, to fight for “capitalization-weighted indexing” against the insurgency of Jeremy Siegel, Eugene Fama, Robert Arnott, and Kenneth French, proponents of a heretical notion of “fundamental-weighted indexing”.

Professor Siegel Throws Down A Glove

Professor Jeremy Siegel had opened the fray by an earlier editorial in the Wall Street Journal of June 14, 2020, proposing that index funds should be weighted on the basis of dividends rather than market capitalization.

Professor Malkiel replied with haughty disdain, calling for caution before accepting the Johnny-come-lately “new paradigm” of “fundamental-weighted indexing”, since this would imply that the “old paradigm — reflected in more than $3 trillion of capitalization-weighted index investment funds — is in error”

Joining Professor Malkiel in the defense of capitalization-weighted indexing was none other than John C. Bogle, who, as patriarch of the Vanguard Group that manages $340 billion in index equity assets, has a very, very large dog in the fight.

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Market capitalization of REITs reached $330 billion by December 2005, according to data published by the industry association, NAREIT.

	Income and Inflation-Protection

Although REITs have been around since the 1970s, this market sector only began to become important in the 1990s, as the graph, at the end of this article, shows.

Market capitalization of the REIT sector is still small compared to the equity market ($11.2 trillion) and mutual funds ($6.4 trillion), and is of a similar order of magnitude as closed-end funds ($278.2 billion) and exchange-traded-funds ($321.6 billion).

Although the REIT sector got off to a rocky start and earned a bad name in the 1970s, when large commercial banks recklessly set up REITs to hold construction loans, causing substantial losses to investors, the business now has been reorganized and is focused on owning and operating large scale commercial properties for the long-term, rather than short-term speculative real estate financing.

Investing the Old-Fashioned Way

For investors who are fed up with the stock buyback-option games and other unethical shenanigans of the main equity market, REITs are a breath of fresh air:

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Federal Reserve flow of funds accounts for Q1 2006 show the degree to which equity investments have fallen out of favor with individual investors.

Flow table F100 (Households) reports annual rates of net direct sales of equities by individuals of $866.5 billion, an all-time high.

This selling is interpreted as reflecting executives exercising stock options in a massive transfer of corporate wealth to favored insiders through buybacks.

On the other hand, net purchases of equities by individuals via mutual funds — for many years a pillar of the stock market — was only $205.1 billion in Q1 2006 (annual rate).

This means that net disinvestment in equities by individuals was $670.9 billion (annual rate) in Q1 2006 — a record!

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