FTSE RAFI: Pronounced “Footsie Raffy”.

FTSE

FTSE got its name because it was a collaboration between the Financial Times and the London Stock Exchange. It is best known for being an index data provider. You are probably most familiar with the FTSE 100 – which is the most widely followed UK stock market index. It is often mentioned in the same breath as the Dow or the S&P 500. FTSE currently provides index data for many thousands of indices globally.

RAFI

RAFI is an acronym for Research Affiliates Fundamental Index. It is a specific fundamental indexation methodology developed by Rob Arnott. Fundamental indexation can take on a variety of forms, mostly based on single metrics (i.e. just sales-weighting, or just dividend-weighting), but RAFI is a more well-thought out design which utilizes a composite of four separate fundamental metrics, and then further uses a five-year rolling average of those numbers. Research Affiliates is Arnott’s company and it gets its name because they are very “research” oriented and then license the use of research-driven products through various affiliates around the world. For example, the company I work for (Pro-Financial Asset Management) is an affiliate in that we provide the unit trust structure of index funds that track FTSE RAFI mandates around the world.

There is roughly US$35 billion in assets indexed according to Research Affiliates methodologies globally. I’ll flesh out the the nature of the methodology in the next post.