Fundamental indexing, the type used with exchange traded funds (ETFs), are starting to show their true colors. PowerShares first introduced an ETF based upon fundamental indexing back in December 2005. Jesse Emspak of Investor’s Business Daily reports since then the PowerShares FTSE RAFI U.S. (PRF) has returned 18.86%, versus the S&P 500 return of 13.62%.

The method has become so popular that Charles Schwab introduced 3 mutual funds based on fundamental indexes in April. Both the Schwab funds and the ETFs have had positive response from investors. Fundamental indexes are not weighted based upon market capitalization, these indexes focus on sales, cash flow, book value and dividends. It doesn’t show the underlying strength or weakness of a company within the index.

Prfchart

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.