Can Fundamental Index ETFs Tame the Bear?

by: Tom Lydon November 21, 2008 | about stocks: PRF / PRFG    
Tom Lydon

Tom Lydon

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Is there anything an exchange traded fund investor can do in a down market such as this besides grin and bear it?

Investment strategies such as stock picking and bond investing are all in the red, so why not a fundamentally weighted indexed ETF?

Ron DeLegge for ETF Guide says fundamentally weighted ETFs try to beat the performance of a traditional index by selecting and weighting stocks according to various financial metrics such as earnings, dividends or book value. A traditional index such as the S&P 500 uses a market-cap weighted approach.

DeLegge points out that, so far, the performance has revealed a mixed bag: large-cap fundamental indexes are underperforming, while small- and mid-caps are slightly outperforming. Among sector funds, the performance also remains mixed.

When you choose a fundamental index there are two things to consider: 1) how it selects securities, and 2) how the securities are weighted.

Always be sure to understand what strategy your ETF follows. As we always say: know what you own.

Year-to-date, the S&P 500 is down 41.5%. In comparison:

  • PowerShares FTSE RAFI Consumer Goods (PRFG), down 39.7% year-to-date

click to enlarge

Consumer Goods ETF

  • PowerShares FTSE RAFI 1000 (PRF), down 44.3% year-to-date

RAFI 1000 ETF

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