PowerShares has launched an ETF that tracks the FTSE RAFI U.S. 1000 index (ticker: PRF).
The Research Affiliates Fundamental Index (RAFI) is designed to beat conventional benchmarks by selecting the largest U.S. stocks according to positive fundamentals. The four key measures of stocks are book value, income, sales and dividends. The 1,000 equities with the highest fundamental strength are weighted by their fundamental scores. The index is rebalanced and reconstituted annually.
Research Affiliates and FTSE Group have been working together to produce the RAFI. The firms cite data showing fundamental indexes produce modestly lower risk and better performance versus cap-weighted indexes. Rob Arnott, chairman of Research Affiliates, says, “Cap-weighted indexes overweight overvalued companies and underweight undervalued companies; this creates a performance drag that isn’t replicated in fundamental indexes.”