[gull]

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But I didn't like cap-weighted indexes either...

Over time my thinking has evolved more like this-- an index is a basket of companies. At the end of the year, it will have a return. It's about as certain as anything can be that the end of year return for all of the stocks will not be the same as the index's return. Rather, some companies will underperform a little, some companies will underperform a lot, some companies will outperferform a little, and some companies outperform a lot. If you knew which one stock would perform the best, you'd just put all your money there and revisit in a year. You don't know, which is why you buy the index. No controversy so far, right? Well, every dollar you put in gets split among the index companies according to the weights. The fact that some components of the index will provide you a better return than others means that some components (stocks) are more 'deserving' of your investment funds than others. Implicitly then, without asking the customer, cap-weighted indexes are saying that the bigger companies in the index are more deserving of your investment dollars than the smaller ones. Mechanically. Without any regard to what's happening in the business or real world. None whatsover. That's stupid.

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This is a very good point. The main benefit of cap-weighted index funds is that there's no unnecessary buying and selling to rebalance. Even so, non-cap-weighted funds offer bigger benefits. If you figure that overvalued stocks will be overrepresented in cap-weighted funds and undervalued stocks will be underrepresented, then it makes sense that non-cap-weighted funds outperform. Some funds are equal-weighted, but even better are the funds that use other weightings. For example, there are funds and ETFs that weight stocks by how small or valuey the stock is. This really boosts performance.