Russell Investments and Research Affiliates announced this week the creation of a new suite of indexes based on the Fundamental index methodology developed by Research Affiliates founder Rob Arnott. The two companies formed a partnership last year, and are now introducing 24 fundamental-weighted benchmarks measuring the performance of domestic and international equity markets.
While many of the most widely-followed indexes are constructed based on market capitalization, Arnott’s research has focused around alternative index construction and maintenance methodologies that break the link between stock price and a security’s weighting within an index. The Russell Fundamental Index Series is created from the Russell 3000 and Russell Global ex-U.S. indexes, where constituents are scored and weighted based on three fundamental measures of company size: adjusted sales, operating cash flow and dividends plus buybacks. The benchmarks are further divided into Large Company and Small Company Fundamental Indexes. The new fundamental benchmarks include:
- Russell Fundamental Global Index
- Russell Fundamental Global Large Company Index
- Russell Fundamental Global Small Company Index
- Russell Fundamental Global ex-U.S. Index
- Russell Fundamental Global ex-U.S. Large Company Index
- Russell Fundamental Global ex-U.S. Small Company Index
- Russell Fundamental Developed Index
- Russell Fundamental Developed Large Company Index
- Russell Fundamental Developed Small Company Index
- Russell Fundamental Developed ex-U.S. Index
- Russell Fundamental Developed ex-U.S. Large Company Index
- Russell Fundamental Developed ex-U.S. Small Company Index
- Russell Fundamental Emerging Markets Index
- Russell Fundamental Emerging Markets Large Company Index
- Russell Fundamental Emerging Markets Small Company Index
- Russell Fundamental U.S. Index
- Russell Fundamental U.S. Large Company Index
- Russell Fundamental U.S. Small Company Index
- Russell Fundamental Asia Pacific Index
- Russell Fundamental Asia Pacific Large Company Index
- Russell Fundamental Asia Pacific Small Company Index
- Russell Fundamental Europe Index
- Russell Fundamental Europe Large Company Index
- Russell Fundamental Europe Small Company Index
RAFI’s ETF Footprint Growing
There are currently a number of ETFs linked to fundamental indexes, including the ProShares RAFI Long/Short (NYSEARCA:RALS). This fund establishes long positions in stocks with RAFI weights larger than their market cap weight and short positions in those with RAFI weights less than their market cap weight. RALS debuted in December, and the fund is up about 2% so far this year.
RAFI indexes also underlie a handful of PowerShares funds, including the Fundamental High Yield Bond (NYSEARCA:PHB). This fixed income ETF weighs junk bonds based not on the size of the debt issue, but rather on the fundamental measures of firm size that include book value, gross sales, gross dividends and cash flow. As a result of this truly compelling methodology, PHB has more of a focus on higher quality junk bonds, putting it somewhere in between LQD and JNK in terms of risk/return profile.
Russell’s ETF Push
Russell is the index provider behind many of the most popular equity ETFs, and in recent months it has taken steps to become more actively involved in the ETF industry. Last year Russell filed for approval on a number of different index-based ETFs, including a Growth at a Reasonable Price ETF (NYSEARCA:GRPC), Low P/E ETF (NYSEARCA:LWPE) and Contrarian ETF (NYSEARCA:CNTR). The company recently acquired Reno-based U.S. One and the firm’s exemptive relief to launch active ETFs. Earlier this month Russell and U.S. One filed details on three fund-of-funds that seem to be modeled after the existing One Fund (NYSEARCA:ONEF), including a Global Opportunity ETF (NYSEARCA:ONEO), Bond ETF (Pending:ONEB) and Inflation ETF (Pending:ONEI).
Disclosure: No positions at time of writing.
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