The Fundamentals of Fundamental Indexing
Should investors consider fundamentally weighted strategies?
Market-cap weighting reflects all market participants’ views, allowing passive investors a free ride on the collective wisdom of all active investors. But there is a risk that it could also lead a portfolio to overweight the most expensive areas of the market.
Fundamental index funds attempt to circumvent this potential problem by severing the link between a stock’s portfolio weight and its price. This article explores the investment thesis of fundamental weighting and examines the investment merits of strategies that use this weighting approach.
Adam McCullough has a position in the following securities mentioned above: VOE, VBR. Find out about Morningstar’s editorial policies.