The funds will be based on the FTSE Research Affiliates
Fundamental Index (RAFI) Series. According to a news
release by FTSE, fundamental indexing improves the
potential for higher investment returns and lower
volatility by offsetting the risks of overexposure to
inflated or understated stock valuations that are
unavoidable in market capitalization weighting.
The FTSE RAFI Series selects and weights stocks based on a company’s sales, cash flow, book value and dividends.
According to the release, Schwab will be using the index as the basis for its newest mutual funds:
- The Schwab Fundamental International Large Company Index Fund (benchmarked to the FTSE RAFI Developed ex US 1000 Index)
- The Schwab Fundamental US Large Company Index Fund (benchmarked to the FTSE RAFI US 1000 Index); and
- The Schwab Fundamental US Small-Mid Company Index Fund (benchmarked to the FTSE RAF US Mid Small 1500 Index).
“Conventional cap-weighting ties the amount
invested directly to the amount that a company is over or
undervalued; most of an investor’s money is therefore
in overvalued stocks,” said Rob Arnott, Chairman of
Research Affiliates, in the news release.
More information about the FTSE RAFI Index Series is available at http://www.ftse.com/Indices/FTSE_RAFI_Index_Series/index.jsp .