Tom,fuzzy, kavi et al.
Any thoughts about these new RAFI etf's ?
PowerShares Website
The PowerShares FTSE RAFI US 1000 Portfolio and FTSE RAFI US 1500 Small-Mid Portfolio are based on indexes designed to track the performance of large-cap and small to medium-sized U.S. companies, respectively. Companies are selected based on the following four fundamental measures of size: sales, income, book value and dividends. Each of the equities with a fundamental weight ranking of 1 to 1,000 (US 1000) and 1,001 to 2,500 (US 1500) is then selected and assigned a weight equal to its fundamental weight.
Sales—A company's 5 year average sales.
Cash Flow—A company's 5 year average cash flow.
Book Value—A company's book value.
Dividends—A company's 5 year average total dividend distribution.
Unlike indexes developed prior to the existence of an exchange-traded fund, the FTSE RAFI US 1000 & 1500 indexes were designed to serve as a basis for ETF investments seeking broad market representation. Similar to the approach used by industry professionals, companies are weighted, not simply by market-capitalization, but rather by the size of their fundamentals.
Old School Investment Approach
Traditional benchmark indexes, including S&P and Russell, typically utilize market-cap weighting structures that embody this traditional investment approach. The cap-weighted structure forces an investor to overweight overvalued companies and underweight undervalued companies, creating a significant growth bias and investment approach which may be contrary to sound investment principles.
New School Investment Approach
Unlike traditional benchmark indexes, fundamentally weighted indexes, like the FTSE RAFI Sectors, utilize weighting structures that embody fundamental measures of size including sales, income, book value and dividends. Fundamentally weighted indexes were created for use in the sophisticated investment approaches used by many investment professionals today. These new advanced portfolio management strategies demand refined investment products like PowerShares that provide the full use of robust financial technology in seeking to deliver the best portfolio performance and efficiency possible.
Incorporating Market Speculation
Market-cap weighted indexes allow the market to dictate the weight a stock receives in an index. This is problematic because market speculation can cause significant mispricing of stocks, which, in turn, results in improper weights in the index. A good example of this phenomenon occurred during the 1999-2000 "bubble" when internet companies initiated market-caps resulting in index weights far in excess of mainline, established companies.
Ignoring Market Speculation
Fundamental indexes do not allow the market to dictate the weight a stock receives in an index. Fundamental indexes do not participate in market bubbles to the same extent as Cap weighted indexes because revenues and dividends are not typically affected by irrational exuberance.
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