Video: The Fundamentals of Fundamental Indexing

This new video from Research Affiliates uses charts, graphics, and animation to explain the Research Affiliates Fundamental Index or “RAFI.” It tells the story of how Research Affiliates co-founders Rob Arnott and Jason Hsu developed RAFI, how RAFI works, and why it’s outperformed the S&P 500 by 1.5% to 2% per year.

Market-cap weighting inherently overweights overvalued stocks and underweights undervalued ones. RAFI, by contrast, uses fundamental factors to weigh holdings according to companies’ macro-economic size. When a stock becomes overvalued relative to their fundamentals, RAFI reduces its holdings of the stock. When a stock is relatively undervalued, then RAFI increases its holdings. The RAFI is balanced across sectors, and the approach can also be used for small-cap, non-U.S. and emerging-market stocks.

Add a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.