%0 Journal Article
%A Dopfel, Frederick E.
%T The Arithmetic of Fundamental Indexing
%D 2008
%R 10.3905/joi.2008.707223
%J The Journal of Investing
%P 114-118
%V 17
%N 2
%X Fundamental indexing is a strategy for investing that deliberately ignores security market prices and instead weights securities proportional to fundamental measures of size such as cash flow, sales, book value and dividends. Such examples of “market value indifferent” portfolios may be referred to as indexes, but they actually generate active exposures intended to outperform capitalization-weighted benchmarks. Thus, these strategies are subject to the same “zero-sum game” arithmetic as other active strategies and may either outperform or underperform the benchmark over any period. The article proposes criteria that should be applied before investing in fundamental and other rule-based active strategies. Otherwise, if the conditions are not satisfied, the investor is better off with cap-weighted indexing that efficiently replicates the performance of the average investor with minimal trading costs and without any presumption of above-average skill.
%U https://joi.pm-research.com/content/iijinvest/17/2/114.full.pdf