At a glance
- When a stock doubles, a cap-weighted index buys more of it, so a portfolio carries the most of a stock after it becomes expensive.
- The same report says Research Affiliates has sold its indices business to TMX, a deal that should help TMX VettaFi scale to $1 trillion in indexing assets.
- RAFI's methodology is already available through ETFs including the Schwab Fundamental US Large Company Index ETF (FNDX) and the Invesco RAFI US 1000 ETF (PRF).
Rob Arnott's case against market-cap weighting goes back two decades. When a stock doubles, a cap-weighted index buys more of it, so a portfolio carries the most of a stock after it becomes expensive. RAFI, the index provider behind his fundamental-index approach, assigns weight by sales, profits, and economic footprint instead. ETF Trends says that business has grown to nearly $200 billion.
The same report says Research Affiliates has sold its indices business to TMX, a deal that should help TMX VettaFi scale to $1 trillion in indexing assets. What began as a critique of index construction is now part of an index firm's growth plan.
RAFI's methodology is already available through ETFs including the Schwab Fundamental US Large Company Index ETF (FNDX) and the Invesco RAFI US 1000 ETF (PRF). Those funds let investors hold the anti-cap-weight position in familiar fund form.
The sale changes ownership, not the mathematics. At nearly $200 billion, the idea is too established to disappear. Whether it stays as sharp under TMX is the open question.
Reported by the Passive & Indexing desk from ETF Trends. Published . Corrections