Unexpectedly Intriguing!
28 June 2007

Six months has passed since we last checked in on how well the concept of weighting the component stocks according to fundamental business metrics is working in practice.

Today, we'll compare the performance of the fundamental-weighted Powershares RAFI 1000 Exchange Traded Fund (Ticker: PRF) at this point against the S&P 500, the iShares Russell 1000 Value Index (Ticker: IWD), and the Russell 1000 (Ticker: RUI). The relative performance of all four funds are plotted over the term of PRF's existence below (click the image for a larger version):

PRF vs SP500, IWD, and RUI at 18 months

At the 18 month mark, the fundamental-weighted PRF is performing considerably better than the S&P 500 and the Russell 1000. Meanwhile, it has largely kept pace with the Russell 1000 Value Index. The following chart reveals the annualized rates of return over the 18-month period beginning from the launch of the PRF exchange traded fund on December 20, 2005:

Annualized Returns of PRF, SP500, IWD and RUI

As of the close of trading on June 20, 2007, fundamental indexing has provided a slight-to-good advantage over the other established indices.

Other Fundamental-Weighted Index News

Back in April, Charles Schwab announced that it would offer three new open-end mutual funds in the U.S. based upon the fundamental-weighted indexing concept developed by Rob Arnott, with Schwab calling it a "better mousetrap."

That "better mousetrap" is being disputed by some of the investing world's heaviest hitters, and is now being examined more closely. (Follow the links for more details!)

And for a quick who's who of who's involved in the debate (aside from Charles Schwab, Rob Arnott and, well, us....), on the institutional side, a number of firms such as Vanguard and Barclays have offered criticism, index fund pioneer Jack Bogle, and a number of academics have also weighed in, or will be soon, including Princeton's Burton Malkiel, Harvard's Andre Perold, Wharton's Jeremy Siegel, and Nobel prize winner Henry Markowitz (of modern portfolio theory fame.)

Previously on Political Calculations

Fundamental Indexing: Market Wrap for Year 1

When PRF turned one year old, we marked the occassion by comparing against the market capitalization-weighted funds that would seem to be the most similar.

Are Fundamental ETFs Worth Their Premium?

The fees being charged by brokerage houses are higher than those of regular index funds. Here, we examined whether the improved returns are justifying the higher expenses for investors. (The answer as of this writing still appears to be "Yes.")

Where Are the Fundamental ETFs?

We first checked in on the performance of the PRF fundamental-weighted ETF against the major stock indices at the ETF's 6-month old mark.

Indexing Fundamentals

We first explored the fundamental-weighted index fund concept in this post. Essential reading for the basic background!


About Political Calculations

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