If you hem and haw before eventually deciding to use cap - weighted ETFs, how will you react if
fundamental indexes outperform over the next two years?
That was a wise choice, because trying to improve on this simple model is, in my opinion, the biggest knock against many of the competitors to these new ETFs, including the iShares CorePortfolios (CBD and CBN), which hold REITs, high - yield bonds, preferred shares, and track
fundamental indexes.
I think
fundamental indexes are better options than market indices for all the reasons Greenblatt identifies.
For instance,
fundamental indexes tend to move money away from growth stocks and into value stocks.
The market characteristics that investors have traditionally gained exposure to, through holding capitalization - weighted market indexes, are equally accessible through
these Fundamental Indexes.
Maintaining low turnover is the most challenging aspect in the construction of
Fundamental Indexes.
In addition to the usual reconstitution, a certain amount of rebalancing is also needed for
the Fundamental Indexes.
We believe the performance of
these Fundamental Indexes are largely free of data mining.
The best of
the fundamental indexes outpaces the Reference Capitalization index by 2.50 % per annum:
(Reciprocally, it can be argued that capitalization - weighted indexes have a growth bias, whereas
the Fundamental Indexes do not.)
The construction of the Reference Capitalization index allows Arnott et al to «make direct comparisons with
the Fundamental Indexes uncomplicated by questions of float, market impact, subjective selections, and so forth.»
In addition, as compared with conventional capitalization - weighted indexes,
these Fundamental Indexes typically have substantially identical volatilities, and CAPM betas and correlations exceeding 0.95.
If an active management process can add value, then it should perform far better if it makes active bets against one of
these Fundamental Indexes than against capitalization - weighted indexes.
The Fundamental Indexes have mostly the opposite characteristics, performing best when US and non-US stocks are falling and REITS are rising.
Although
the fundamental indexes sound interesting I'd like to wait and see if the actual returns can replicate the back - tested results.
Frank Russell Company and Research Affiliates have entered into a strategic alliance with respect to the Russell
Fundamental Indexes.
The FTSE Research Affiliates
Fundamental Indexes are calculated by FTSE International Limited («FTSE») in conjunction with Research Affiliates.
Subject to Research Affiliates» intellectual property rights in certain content, Frank Russell Company is the owner of all copyrights related to the Russell
Fundamental Indexes.
Really, why would anyone use cap - weighted index funds when equal - weighted indexes,
fundamental indexes and value - weighted indexes all crush them over the long run?
Let's start with the positive results: the three core equity funds tracking the RAFI
fundamental indexes had very low tracking errors.
Claymore, on the other hand, has been a vocal critic of cap - weighting and the leading Canadian proponent of RAFI
fundamental indexes.
Cap - weighted index funds may be flawed, but they do have at least one thing that
fundamental indexes don't yet have: a long track record of delivering on their promises.
I wanted to know if ETFs based on
fundamental indexes could make the same claim.
The RAFI
fundamental indexes remove stock prices from the equation.
He likes the market cap - weighted indexes (like the S&P 500 Index) and is very skeptical about
fundamental indexes.
The request to regulators by Claymore comes on the heels of PowerShares» decision to close 19 of its ETFs, a dozen of which were based on
fundamental indexes created by Rob Arnott's Research Affiliates.
Authors of
The Fundamental Index: A Better Way to Invest, they found that building indexes based purely on market cap produced worse returns than indexes based on other measures.
Fundamental Index is a registered trademark of Research Affiliates, LLC., which is not affiliated with The Charles Schwab Corporation or its subsidiaries, including CSIM and Schwab.
Perspective on the benefits of combining fundamental and market - cap indexing, and why Schwab believes now is a good time for
fundamental indexing.
Unlike traditional index strategies that typically weight companies based on market capitalization, such as the S&P 500 Index,
Fundamental Index strategies use objective financial measures based on company size.
A pioneer in
Fundamental Index strategies, we provide investors 12 ETFs and mutual funds that offer a complement to traditional market - cap - weighted index and actively managed strategies.
On the heels of a momentum - based environment in 2017, we may be approaching a market inflection point that could benefit
Fundamental Index ™ strategies.
Fundamental Index strategies can serve as a complement to traditional market cap weighted index and actively managed strategies — providing investors the potential for more attractive risk - adjusted returns across various market cycles.
Does
the Fundamental Index strategy work better in certain interest - rate environments?
We do know, historically, that
the Fundamental Index method adds its best value during weak markets.
Does
the Fundamental Index strategy take demographic trends into account?
It's analogous to the story within stocks that
the Fundamental Index strategy performs best when value is winning, and not so well when growth is winning.
With bonds,
the Fundamental Index strategy performs best when the market is reassessing and reining in the valuations of the most deeply indebted companies.
We don't expect
the Fundamental Index alpha to be materially affected by demographic shifts.
That works against
the Fundamental Index strategy.
iShares International
Fundamental Index.
Arnott is a proponent of
fundamental indexing, which uses a companyâ $ ™ s fundamentals: sales, profits, book value, and dividends to determine its weighting in an index.
Fundamental indexing is just another form of enhanced indexing, tilting the portfolio to value, and smaller cap, both of which tend to lead to outperformance.
Well, in tests going back to 1962, the particular method of
fundamental indexing that the authors use would beat the S&P 500 by 2 % / year.
Though the book is about
fundamental indexing, and the intellectual and market battle versus classic indexing, there are many other topics touched on in the book, including:
Fundamental Indexing will change valuations in the marketplace as it becomes a bigger strategy, wiping out some of its advantages.
It is well - written, and ably sets forth the case for
fundamental indexing.
The ï ¬ nancial entrepreneurs behind the various versions of
fundamental indexing canâ $ ™ t even agree on what factors to use in selecting stocks.
They all have a large - cap option that includes currency hedging, plus Scotia iTrade and Virtual Brokers also offer the iShares US
Fundamental Index (CLU.C), which does not use hedging.
Regarding currency hedging, I also noticed they created today the «Claymore US Fundamental ETF (non-hedged)» http://claymoreinvestments.ca/etf/fund/clu.c And, I'm not making this up, I quote: «The Claymore US
Fundamental Index ETF (non-hedged) will hedge its exposure to US currency to eliminate foreign currency return risk for Canadian investors.»