Fundamental index-based exchange traded funds have taken off as investors broaden their scope and scour for new ways to improve returns.
ETF Trends’ Tom Lydon recently sat down with Rob Arnott, Chairman and Chief Executive Officer of Research Affiliates, to explain fundamental indexing and its impact on investing.
“We want to weight companies according to how big their business is,” Arnott said. “What are its sales, what are its profits, what’s its book value, what are it’s dividends; four different measures of the size of a company’s business to give us a nice composite measure of the overall scope of the business.”
These factors help provide a set rule “for rebalancing and for concentrating against the emotion driven shifts in price that are constantly happening in the market place,” Arnott added.
This rules-based indexing methodology has shown a strong track record as well.
“We’ve found that fundamental index beats cap-weighted by about 2% a year in major economies like the U.S., by maybe 3% in smaller economies and smaller companies, by 4% a year when applied globally, by 6 or 8 percent applied to emerging markets,” Arnott said.
Watch the video below to see the full interview with Rob Arnott.
To view past video interviews, visit our video section.