Alternative indexing methodologies have been gaining momentum. Over the first five months of 2013, U.S.-listed ETFs that track alternative indices have gathered 43% of new net inflows, compared to 20% for all new inflows last year.
The two most common alternative indexing styles revolve around equal-weight and fundamental strategies. Equal-weight indices would simply allocate an equal share of the index to each component stock. A fundamental index uses “fundamental” value figures such as sales, earnings, book value, dividends or cash flow to select component stocks. However, the strategies may be slightly more expense than traditional market-cap index ETFs.
For instance, the Gugenheim S&P 500 Equal Weight ETF (NYSEArca: RSP) has a 0.40% expense ratio, compared to the SPDR S&P 500 (NYSEArca: SPY) with a 0.09% expense ratio. RSP has consistently outperformed SPY over the past 10 years, generating an average 9.7% over the past decade, compared to the 7.3% return of SPY. [‘Enhanced’ Index ETFs That Are Outperforming the S&P 500]
Additionally, the PowerShares FTSE RAFI U.S. 1000 (NYSEArca: PRF), a fundamentally weighted index of the largest U.S. companies, has generated an average 11.0% over the past five years, compared to the 7.1% gain in the iShares Russell 1000 Value Index (NYSEArca: IWD).
For more information on ETFs and indexing, visit our indexing category.
Max Chen contributed to this article.