Critics of the market-cap methodology argue that the indices lean toward increasingly more expensive stocks as the market capitalization distends.
On a performance basis, Research Affiliates calculated that from 1962 through 2012, the annaul return of the Research Affiliates Fundamental Index Composite outperformed the S&P 500 by 2.1% per year. [A Fundamentally Weighted ETF That’s Beating the Market]
“We don’t believe the markets are perfectly efficient,” Shepherd said. “A fundamental system, with regular rebalancing, is a great way to take advantage of those inefficiencies.”
For more information on indexing in ETFs, visit our indexing category.
Max Chen contributed to this article.