We highlighted the equal weighting methodology late last week which gives us an opportunity to speak about another alternative to familiar market cap indexing, and that is the broad category of “fundamental indexing.”

Specifically, we will cover the small cap U.S. equity space since many analysts typically believe that there are larger inefficiencies due to lack of analyst coverage and the nature of small cap stocks as opposed to large or mid-caps, and that said, these inefficiencies often create opportunities for greater returns depending on the investment methodology utilized.

PowerShares FTSE RAFI U.S. 1500 Small-Mid (NasdaqGM: PRFZ) for example employs a fundamental methodology that screens equities by book value, cash flow, sales and dividends.

WisdomTree Small Cap Earnings Fund (NYSEArca: EES) on the other hand weights companies according to their earnings via a proprietary index and methodology, and RevenueShares Small Cap (NYSEArca: RWJ) takes an existing index, the S&P Smallcap 600, and ranks the members by top line revenue while employing a once per year rebalance.

Since inception in 2006, PRFZ has returned 15.09% versus its market cap weighted benchmark iShares S&P Smallcap 600 (NYSEArca: IJR) up 3.20%. EES debuted in March of 2007, and has lost 7.07% during this timeframe versus IJR down 9.50%.

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