Fundamental Indexation

Rob Arnott, Jason Hsu

Research

17 Pages

The authors examine whether weighting stock indexes by company fundamentals offers advantages over weighting by market value. Their historical tests show stronger returns with comparable volatility, while raising questions about whether the difference reflects market mispricing, a value tilt, or additional risks.

Key Takeaways

Higher Historical Returns: From 1962 to 2004, the composite index returned 12.47% annually versus 10.53% for the S&P 500, before transaction costs.
Comparable Volatility: The composite index’s annual volatility was 14.7%, compared with 15.1% for the S&P 500.
More Trading Required: Annual turnover averaged 10.55% for the composite index versus 6.30% for the reference portfolio, reflecting additional rebalancing.
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