35 Pages Posted: 15 Oct 2004 Last revised: 30 Dec 2016
Date Written: 2005
A trillion-dollar industry is based on investing in or benchmarking to capitalization-weighted indexes, even though the finance literature rejects the mean-variance efficiency of such indexes. This study investigates whether stock market indexes based on an array of cap-indifferent measures of company size are more mean-variance efficient than those based on market cap. These “Fundamental” indexes were found to deliver consistent, significant benefits relative to standard cap-weighted indexes. The true importance of the difference may have been best noted by Benjamin Graham: In the short run, the market is a voting machine, but in the long run, it is a weighing machine.
Keywords: Indexation, Fundamental Indexing, Non-cap based indexing, Mean-Variance Efficiency, Portfolio Construction, Value Premium, Return Predicability
Suggested Citation: Suggested Citation
Arnott, Robert D. and Hsu, Jason C. and Moore, Philip, Fundamental Indexation (2005). Financial Analysts Journal, Vol. 61, No. 2, March/April 2005, pp. 83-99.. Available at SSRN: https://ssrn.com/abstract=604842 or http://dx.doi.org/10.2139/ssrn.604842
By Jason Hsu