Friday, February 15, 2008

Fundamental Indexing vs. a Passive Strategy

According to PowerShares Capital Management LLC The PowerShares FTSE™ RAFI US 1000 Portfolio (Fund) is based on the FTSE™ RAFI US 1000 Index. The Index is designed to track the performance of the largest U.S. equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The 1000 equities with the highest fundamental strength are weighted by their fundamental scores. The fundamentally weighted portfolio is rebalanced and reconstituted annually.

According to Dow Jones the Dow Jones Averages components are selected at the discretion of the editors of The Wall Street Journal. There are no pre-determined criteria except that components should be established U.S. companies that are leaders in their industries;

For the sake of continuity, composition changes are rare, and generally occur only after corporate acquisitions or other dramatic shifts in a components core business, the Dow Jones Industrial Average is not limited to traditionally defined industrial stocks. Instead, the index serves as a measure of the entire U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods.

Question - how come the "managed" PowerShares are under performing the "unmanaged" Dow Industrials? So much for Fundamental Indexing.

Bill Carrigan

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