7 Pages Posted: 29 Jul 2008 Last revised: 15 Dec 2008
Date Written: July 1, 2008
In this paper we critically examine the novel concept of fundamental indexation. We argue that fundamental indexation is by definition nothing more than an (elegant) value strategy, because the weights of stocks in a fundamental index and a market capitalization-weighted index only differ as a result of differences in valuation ratios. Moreover, fundamental indices more resemble active investment strategies than classic passive indices, because (i) they appear to be at odds with market equilibrium, (ii) they do not represent a buy-and-hold strategy and (iii) they require several subjective choices. Last but not least, because fundamental indices are primarily designed for simplicity and appeal, they are unlikely to be the most efficient way of benefiting from the value premium. Compared to more sophisticated, multi-factor quantitative strategies, fundamental indexation is likely to be an even more inferior proposition.
Keywords: Indexation, Fundamental Indexing, Alternative Beta, Value Premium, Capitalization Weighting, Non-Cap Based Indexing, Portfolio Construction
JEL Classification: G11, G12
Suggested Citation: Suggested Citation
Blitz, David and Swinkels, Laurens, Fundamental Indexation: An Active Value Strategy in Disguise (July 1, 2008). Available at SSRN: https://ssrn.com/abstract=1184848 or http://dx.doi.org/10.2139/ssrn.1184848
By Jason Hsu