A Fundamental Shift to Fundamental Indexing.

A new approach to constructing index funds is gaining increasing prominence in the never-ending debate over active versus passive equity management. As total assets invested in fundamental index mutual funds approach $8 billion, personal financial planners and private wealth managers can expect to receive more inquiries from their clients about this relatively new phenomenon. In contrast to conventional index funds, fundamental index funds weight the percentage allocation of each stock in the index based on "fundamental" factors, such as total dollars of earnings or dividends paid, rather than simply market capitalization. Whether or not fundamental indexing is a revolution in theory, the intuitively appealing logic in favor of fundamental indexing and the excellent performance of fundamental index funds to date should command the attention of individual investors and their advisors. Since the first FTSE RAFI^® 1000 Fundamental Index Fund was launched in December of 2005, FTSE RAFI^® and Wisdom Tree fundamental index funds have attracted more than $7.5 billion of investments in mutual funds and exchange-traded funds (ETFs) dedicated to the fundamental index strategy. On the institutional side, institutional investors have more than $22 billion invested that follow the Research Affiliates' fundamental index models.' The extraordinary success of this new investment concept most likely flows from the fact that fundamental indexing makes a lot of intuitive sense as an opportunity for risk reduction and return enhancement. Fundamental indexing is likely to prove to be a viable in vestment option for many years to come. [ABSTRACT FROM AUTHOR]