Fundamental indexing outperforms market cap
Banking on the fundamentals rather than the market capitalisation has seen strong results for BetaShares FTSE RAFI Australia 200 exchange traded fund (ETF) which returned 19.68 per cent for the one year to 30 June 2017.
The ETF, with the ticker QOZ, has come in at second place for the top five index Australian equities broad cap funds, according to FE Analytics data.
The fund overweights relative to market cap index stocks that are cheap and underweights stocks that are expensive.
BetaShares managing director, Alex Vynokur, said this produced historically persistent outperformance as the stocks’ mis-valuations were corrected over time.
“If you look at the performance of QOZ it’s produced fairly impressive performance, outperforming the market cap weighted index. The rotation out of the high price defensive income stocks in the Australian equity market in recent months and at the same time the rotation toward sectors that offer relatively better value,” he said.
“This is whether you look at resources and other sectors, QOZ has demonstrated the ability to outperform traditional market cap weighted indices.”
The fund is currently overweight in its consumer staples, energy, and real estate stocks.
Vynokur also said that the fund performed well against active managers as the fund ranked second in comparison to 211 active managers for its one year to 31 March 2017 return.
He noted that when advisers thought about index funds they traditionally assumed that the fund was a market cap weighted index fund and not anything else.
“QOZ has demonstrated that there are smart indices, and some people call it smart beta, and there are more intelligent ways to construct an index and QOZ is a great example of that,” he said.
“It delivers all the benefits of indexing, low cost, diversification, simplicity, but at the same time also transparency but also delivers outperformance.”
The top fund was also a BetaShares ETF that used a geared strategy to lift its return 7.2 per cent above the FTSE RAFI Australia 200 ETF.
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