RT Journal Article
SR Electronic
T1 Fundamental Indexes™
JF ETFs and Indexing
FD Institutional Investor Journals
SP 111
OP 121
VO 2006
IS 1
A1 Robert D. Arnott
A1 John M. West
YR 2006
UL http://guides.pm-research.com/content/2006/1/111.abstract
AB Since the initial circulation of Fundamental Indexation research in mid-2004, the concept has spurred great interest and debates in the investment community. At its core, Fundamental Indexing argues that cap-weighting systematically overweights overvalued stocks and underweights undervalued stocks in a portfolio, which leads to a return drag in traditional indexes. Unless we believe that share prices are identically equal to the eventual true fair value of a company, this is an obvious truism. Advocates of cap-weighting generally dismiss this concern with the equally true observation that we cannot know which companies are over- or under-valued. We first outline the methodology and results of the original research in large company US stocks and then review future applications; namely extending down the size spectrum, applying internationally and using Fundamental Indexing in sector funds. The excess returns of fundamental Indexing are found to be considerably larger in smaller company and international portfolios. Meanwhile, sector funds based upon Fundamental Indexes produce excess returns in all ten economic sectors over a sixteen-year period.