A reader writes in with a question (I’ve excluded superfluous information):
I had a question regarding the Fundamental Index® Vs Value Indexes. I am a regular 30 something male who invests for retirement through a brokerage. I invest primarily in index etfs by weight cap. (large US, large Intl, large Cdn, small US, small Intl, Small Cdn, and Emerging markets). I would like to tilt my portfolio towards value, and so I’ve been doing some research on Value etfs. From what I understand fundamental indexes work similar in theory to value indexes. Does this mean that when I’m searching for value indexes for my portfolio I could replace it with something like the FTSE RAFI
I’m interested on your thoughts…
Thanks for the question Kenny. (Disclosure: I work for an index mutual fund manufacturer that specializes in the Fundamental Index strategy.)
To actually answer your question “Does this mean that when I’m searching for value indexes for my portfolio I could replace it with something like the FTSE RAFI® and it would be a similar investment?”:
Remember, you get what you pay for, and this is all IMHO: You could indeed replace your value indexes with a FTSE RAFI strategy. It would be somewhat similar, as there is pretty much always a value bias but it is important to note that the excess returns of a FTSE RAFI strategy have been shown to be greater than the excess returns of a static value tilted index over the non-value tilted cap-weighted index. There is so much more to a Fundamental Index than the value tilt. I strongly recommend picking up the book “The Fundamental Index” by Robert Arnott, Jason Hsu and John West to really understand it. (Disclosure: this is an affiliate link.)
Amazing read. Interesting take on finances. This is a very important aspect of peoples’ lives nowadays.