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The Index Trade

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Investors often use big ETF's such as the SPY to track major benchmarks like the S&P 500. But are there better ways to play the indexes?

One of the problems with ETFs, explains Pete Najarian on CNBC's "Closing Bell", is the weighting.

For example if you look at the Retail HLDRS , 20% is made up of Wal-Mart while 40% of the Energy Select Sector SPDR is made up of Chevron, Exxon and ConocoPhillips. Sometimes these ETF’s aren’t as diversified as an investor might like.

In that case, it might be worthwhile to consider index alternatives, explains Rob Arnott, Chairman Of Research Affiliates. Fundamental indexes are not tied to market cap, he explains. Instead, these indexes anchor to factors such as sales, profits, book value and dividends. The one that gets the most followed in the US is the PRF, he adds.

Trad Fundamental Sector
SPY PRF Large Cap
PFRZ IWM Small Cap
EPP PAF Asia ex Japan
IEV PEF Europe


For more on fundamental indexes please watch the video:

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Trader disclosure: On Apr.3, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (MSFT), (YHOO); Najarian Owns (XLF), (AAPL), (CSCO); Najarian Owns (MER) Puts; Najarian Owns (AA) Calls; Finerman Owns (GS), (NYX), (MO), (MSFT), (FNM), (VLO), (SUN), (TSO), (FNM); Finerman is Short (GLD)