Broad markets have done quite well so far in 2013, as U.S. stocks have led an asset price recovery for much of the year. And with a low likelihood of a QE taper in the near term, we could definitely see more bullishness ahead too (see 3 Top Ranked ETFs from Red Hot Sectors).
Yet while a broad approach to the market is certainly a low risk and easy way to gain exposure to this trend, there are actually several funds that follow ‘fundamental’ indexes that may actually be better picks.
These funds seek to break the link between prices (and thus market capitalization) and security weight, and instead look to focus on other factors be it revenues, dividends, or a combination of items such as in the ‘RAFI’ model.
RAFI in Focus
The RAFI approach looks to take four measures of a firm’s size in order to determine its weight; book value, dividends, cash flow and sales. This technique can lead to big differences in weights when comparing traditional cap-weighted products to RAFI-based funds, but it can also lead to outperformance too.
Investors have definitely seen this with two such RAFI funds, the PowerShares FTSE RAFI US 1000 (PRF - Free Report) , and the PowerShares FTSE RAFI 1500 Small-Mid ETF (PRFZ - Free Report) , as these have thoroughly crushed comparable funds over long time periods. In fact, PRF has beaten SPY 137.1% to 102.4% over the past five years, while PRFZ has trounced IWM over the same time frame: 181.8% to 125.1% (see all the Top ETFs here).
There is more than outperformance for investors to be aware of for these products, as often times volume and assets are a bit lighter here. However, we have discussed some of these key aspects in our short video below, make sure to watch!
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