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Tuesday, July 9, 2013

WSJ on Fundamental Indexing

Long term investors recognize that a "value tilt' to a portfolio makes sense...and the RAFI PRF methodology seems to have done quite well vs the more traditional cap weighted Russell 1000 index.

WSJ on the subject

...."Because they are weighted differently, the alternative indexes create more of a tilt toward smaller-cap stocks or value-oriented shares, or both. The long-term tendency of these types of stocks to outperform large-cap stocks and the so-called growth stocks of rapidly expanding companies is so persistent that it has its own name: the Fama-French model, named after the University of Chicago academics who first documented the effect....
Another option is to use low-cost market-cap-weighted funds and tilt your portfolio consciously toward value and small-cap stocks. This, however, only captures part of the outperformance of the alternative indexes, because the holdings within those funds are still weighted by market capitalization. For example, thePowerShares FTSE RAFI US 1000 PRF +0.61% has a five-year annualized return through June of 10.3%, beating the iShares Russell 1000 Value Index'sIWD +0.50% 6.5% and the small-cap iShares Russell 2000 Index's IWM +0.48%8.7%.

A more appropriate comparison would be matching the RAFI large cap ETF PRF against VTV based on the Russell 1000 Value. Here is a 5 year chart, the RAFI fundamental index large cap (black) has shown a consistent outperformance vs VTV /Russell 1000 value.

5 Years PRF (black line) vs VTV

A similar pattern can be seen in the small cap space with VBR representing the Russell 2000 value and PRFZ the small cap fundamental RAFI index (black line)

5 Year chart PRFZ (black line) vs VBR

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