The oldest ETFs are pegged to indices that weight stocks by size or market capitalization in an effort to simply mirror the market. However, some ETFs are finding success and assets with benchmarks that weight companies by fundamental factors such as dividends or revenue.
“These funds tend to straddle the lines between passive and active management,” Paul Baiocchi, market researcher, said in a recent report. “It’s a type of market that can appeal to both types of investors.” [A Fundamentally-Weighted Index ETF That’s Beating the Market]
Traditional market-cap weighted indices have a place in stock markets and investing, however, alternative indexing methods have been able to keep pace with the evolution of global markets and the complexity within them, according to one financial advisor.
Research Affiliates have been at the forefront of fundamental indexing, creating indices that select and weight stocks by measures such as profit, sales, or dividends. Market-cap weighting is the most traditional and common index profile, which ranks stocks strictly by market cap, or share price multiplied by the number of shares outstanding, reports Murray Coleman for The WSJ. [Rising Interest for Alternative Enhanced Index ETFs]
Market-cap weighting has been criticized because they tend to weight heavily toward overvalued stocks. Fundamental indexing breaks the mold as the number of resourceful, performing, broad-based indices is relatively small.
PowerShares has already broken ground with many fundamentally-weighted index tracking ETFs.
Charles Schwab has five fundamental index funds, using the methodology advanced by Rob Arnott, head of Research Affiliates, reports USA Today. Schwab has filed to launch fundamental index ETFs. [The Ins and Outs of an Equal-Weight ETF]