A Bright Future for Fundamental Indexing

Exchange traded funds built on the traditional market capitalization weighting methodology have dominated the fund landscape for years and will always have a place in portfolios. However, fundamentally-weighted indices soaring in popularity and could increasingly serve as complements to cap-weighted strategies in the coming years.

Although fundamentally-weighted indexing has become increasingly popular in the ETF community in recent years, the concept of fundamental indexing has been around a lot longer than many investors may realize.

“A lot of these strategies have been around a long time,” said Russell Investments Investment Strategist David Koenig in an interview with ETF Trends from the Morningstar ETF Invest Conference in Chicago.

Russell Investments is the index provider for some of the largest cap-weighted ETFs, including the iShares Russell 2000 ETF (NYSEArca: IWM), but the Seattle-based firm is also a major purveyor of fundamentally-weighted indices.

Koenig highlighted an element to fundamental indexing that many investors may not be familiar with, that being many non-cap weighted indexes are based on academic research. Indices based on that research can provide investors with superior risk adjusted returns.

“A lot of of non-cap weighted indices are underpinned by academic research and can provide investors with superior risk-adjusted returns,” said Koenig. “Low volatility products are historically able to produce lower standard deviation returns.”

Fundamentally-weighted strategies are becoming more accessible to advisors and investors and Russell is helping drive that increased accessibility. In August, Schwab rolled out six new ETFs benchmarked to Russell indices. The Russell indices used by the Schwab ETFs were created as part of an agreement between Russell and California-based Research Affiliates. [Schwab Launches 6 Fundamental ETFs]