Index Strategies

RAFI Fundamental Indices

AT A GLANCE

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Breaks the link between price and weight
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Embeds a buy-low, sell-high approach
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Thoughtfully designed and highly implementable

The RAFI Fundamental Index strategy is built on the principles of contrarian investing and disciplined rebalancing.

Traditional passive investment vehicles are market capitalization–weighted, which means that as the price of a company increases so does its overall weight in the portfolio. The result is a systematic overweight to the most overvalued companies and a systematic underweight to the most undervalued companies.

The RAFI Fundamental Index is a non-price-weighted index strategy that aims to deliver excess returns versus the cap-weighted benchmark. The strategy uses fundamental measures of company size to select and weight companies and to systematically rebalance against the market’s constantly shifting expectations. The approach eliminates the performance drag associated with traditional passive investment vehicles and has historically led to outperformance in developed markets of approximately 1.5%–2.0% a year.1

1. “Fundamental Indexation.”  2005. Arnott, Hsu, and Moore.

Thoughtfully designed to deliver for investors

The RAFI Fundamental Index Strategy

  • Breaks the link between price and weight.
    Using fundamental measures of company size to sever the link between price (market capitalization) and portfolio weight avoids significant overweights to the trendy, popular, and most expensive securities.
  • Engages in contrarian rebalancing.
    Systematic rebalancing using a company’s fundamental weight as a rebalancing anchor embeds a buy-low, sell-high approach in the strategy, selling securities whose prices have increased and purchasing securities whose prices have fallen and thus have more attractive relative equity valuations.
  • Benefits the investor.
    Preserving all the positives of traditional passive investing—simple, transparent, broadly diversified, and low cost—as well as using regular periodic rebalancing helps investors capture excess return from long-term mean reversion, one of the largest and most persistent active investment opportunities.

 

INVESTMENT
PROCESS

RAFI FUNDAMENTAL INDEX
RESOURCES

RAFI Roadmaps provide the theoretical and empirical evidence behind the index strategy as well as current valuations and explain how the valuations translate into expected returns.

Factsheets provide information on recent performance, attribution, characteristics, country/sector weights, and top holdings.

Performance Snapshot

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