What is Fundamental Indexing?

Index funds weighted by the size of the company are inefficient and expensive to put together, say critics. What about weighting by profits, dividends or revenues instead?

Morningstar Analysts 9 November, 2018 | 12:22PM

HSBC Bank

Weighting an index by the size of a company should reflect all market participants' views, allowing passive investors to free-ride on the collective wisdom of all active investors. But there is a risk that market cap weighting could also lead a portfolio to overweight the most expensive areas of the market. A FTSE 100 tracker, for example, would be heavily weighted towards HSBC (HSBA) and Royal Dutch Shell (RDSB).

Market-cap weighted indices are inherently efficient and inexpensive to implement. A passive fund manager has to buy all the shares in the index, which in the case of the FTSE All Share and S&P 500 runs into hundreds of companues.

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