Does Fundamental Indexing Work?

Three years after their introduction, fundamental ETFs are showing mixed results according to MarketWatch’s John Spence.

Fundamental ETFs track an index that is weighted by revenue, earnings or some measure other than market cap. Their proponents claim that funds weighted on fundamentals are less risky and have a better chance of outperformance than funds that are top heavy with pricy stocks.

Spence points out that the PowerShares FTSE RAFI 1000 Portfolio ETF (PRF) averaged a 6.7% negative return since its launch in December 2005 compared to a negative 7.1% for the SPDR S&P 500 ETF (SPY) over the same period.

However, the WisdomTree LargeCap Dividend Fund (DLN) has underperformed the market since its launch in June 2006. Dividend weighting causes funds to over expose to the financial sector which was hit hard by the credit crisis last year.

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