Fundamental Focus

An innovative way to play the market is via “fundamental indexing,” an approach that measures a company’s footprint on the overall economy. Attributes such as book value or operating income are used to make up such indexes. If book value is used, for example, and Company X’s book value is twice that of Company Y, then X would get twice the weight of Y in this type of fundamental index.

Looking backward more than 40 years, fundamental indexes have outperformed familiar indexes such as the Standard & Poor’s 500 and the Dow Jones Industrial Average by a sizable amount: some fundamental indexes would have wound up with more than twice the end value of the traditional indexes.

If you’re interested in fundamental indexes, investment opportunities include:

• FTSE RAFI US 1000, an exchange-traded fund (ETF) that tracks an index developed by Research Affiliates, a leader in fundamental indexing.
• PIMCO Fundamental Index Plus, a mutual fund that invests in the Research Affiliates index as well as in a portfolio of short-term bonds.
• PIMCO Fundamental Index Plus Total Return, a mutual fund similar to the one named above, but with the addition of medium-term bonds. Thus, this fund may have more volatility as well as higher long-term returns.