The investment industry had already begun to respond with products that dealt with Nortel s dominant status in the domestic market. It is also unveiling a pair of bond funds and four sector index funds. Other products have been developed, such as Fifty Nine Corp., which holds 59 of the largest issues in Canada but not Nortel. Sophisticated investors and institutions might have hedged exposure to Nortel by buying put options that would rise in price should the drop in the stock materialize. In much of the rest of the world, indexing is generally a far more diversified affair.
Indexing works better in highly liquid markets such as the United States.
In fact, some years ago, indexing advocate Ted Cadsby, CEO of CIBC Securities Inc., opted to scrap the bank s actively managed U.S. equity fund in favour of an indexed fund. You get a small but reasonable exposure to your important Canadian companies like Nortel, Seagram and JDS Uniphase with the U.S. indexes. That is all you need. While some critics have compared index funds to momentum funds, it s not true that indexing is insensitive to fundamental valuation considerations. Some passive ETFs allow you to focus on either growth or value stocks.