Fundamental indexation: An active value strategy in disguise

David Blitz () and Laurens Swinkels

Journal of Asset Management, 2008, vol. 9, issue 4, No 2, 264-269

Abstract: 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-capitalisation-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; capitalisation weighting; portfolio construction (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (17)

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DOI: 10.1057/jam.2008.23

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