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https://www.invesco.com/us/financial-products/etfs/strategies/fundamental-investing

Invesco

2020-06-30 16:11:27, , source

Content Categorization
/Business & Industrial
/Finance/Investing

Word Count:
186

Words/Sentence:
93

Reading Time:
1.86 min

Reading Quality:
Advanced

Readability:
16th or higher

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The RAFI® approach is based on the premise that traditional indexes are flawed in the way they handle mispricing.

During the years leading up to the global financial crisis, financial companies like Wells Fargo and American Express traded on average at about 2.2x book value.

As the market bottomed in March 2009, financials traded at less than 0.5x book value before climbing back to pre-2009 levels.

The bursting of these bubbles offers evidence of the existence of mispricing. An index strategy that weights by non-price measures would have rebalanced into these financial stocks when their prices were low and their valuations were attractive.

Financial bubble visualized

Source: Research Affiliates®, LLC and Factset, Dec. 31, 2010

In an effort to mitigate the effects of mispricing, the Fundamental Index methodology assigns weights to stocks based on four fundamental factors:

Book value

Trailing five-year average cash flow

Trailing five-year average sales

Trailing five-year average gross dividends

These are objective factors that exist independently of a stock's price and seek to provide metrics of size that are not swayed by the whims of the market.

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