For example, Arnott explains how the RAFI methodology may tilt toward stocks that show cheaper valuations due to its multi-factor approach and underweight more expensive stocks. Looking at PRF’s holdings, Exxon Mobil (NYSE: XOM) is currently the largest position in the fund’s portfolio at 2.9%. Arnott shows that the RAFI weighting methodology ranks the energy company second in sales, first in cash flow, second in dividends and fifth in book value among the universe of U.S. large-caps. In contrast, the widely popular Apple (NasdaqGS: AAPL) has a 1.3% position in PRF’s portfolio. AAPL has seen prices rise over the years, but the tech company shows less favorable dividends and a pricier book value.

Currently, PRF’s portfolio favors a 22.0% tilt toward the financial sector, along with 12.4% information technology, 11.5% consumer discretionary, 10.7% health care, 10.5% industrials, 10.4% consumer staples, 9.9% energy, 5.3% utilities, 4.0% telecom and 3.2% materials.

Moreover, the smart-beta ETFs will periodically rebalance its positions to account for changes in the valuation metrics to potentially capture excess returns and to lower exposure to pricier segments of the market.

PRF shows a 15.6 price-to-earnings and a 1.8 price-to-book, according to Morningstar data. Meanwhile, the S&P 500 index is trading at a 18.5 P/E and a 2.4 P/B. The fundamental strategy has also slightly outperformed over the years, with PRF generating an average annualized return of 6.8% over the past 10-years, compared to S&P 500’s 6.4% return.

Financial advisors who are interested in learning more about fundamental, smart-beta ETF strategies can listen to the webcast here on demand.