Fundamental Indexation: An Active Value Strategy in Disguise

Journal of Asset Management, Vol. 9, No. 4, pp. 264-269, November 2007

Posted: 2 Nov 2008

See all articles by David Blitz

David Blitz

Robeco Quantitative Investments

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Quantitative Investments

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Abstract

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

Blitz, David and Swinkels, Laurens, Fundamental Indexation: An Active Value Strategy in Disguise. Journal of Asset Management, Vol. 9, No. 4, pp. 264-269, November 2007. Available at SSRN: https://ssrn.com/abstract=1277066

David Blitz (Contact Author)

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Laurens Swinkels

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Quantitative Investments ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

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