Is the RAFI strategy really an “index?”
The answer depends entirely on how one defines an “index.” From the perspective of the Capital Asset Pricing Model—the seminal work that relates the price of each security to the market as a whole—anything that’s not cap-weighted is neither passive nor is it an index. By this definition, a Fundamental Index strategy is neither passive nor an index. If, alternatively, we define an index as something which is formulaic, objective, transparent, historically replicable and low-turnover, a Fundamental Index strategy qualifies on all counts.
The answer depends entirely on how one defines an “index.” From the perspective of the Capital Asset Pricing Model—the seminal work that relates the price of each security to the market as a whole—anything that’s not cap-weighted is neither passive nor is it an index. By this definition, a Fundamental Index strategy is neither passive nor an index. If, alternatively, we define an index as something which is formulaic, objective, transparent, historically replicable and low-turnover, a Fundamental Index strategy qualifies on all counts.
