Invesco PowerShares' collection of ETFs based on Research Affiliates’ Fundamental Index (RAFI) methodology have reached the $5 billion milestone in collective assets under management, the latest sign that so-called fundamental indexing is catching on.
PowerShares is one of the first ETF providers to sponsor funds using the fundamental index methodology, launching the first RAFI-based fund, the PowerShares FTSE RAFI US 1000 Portfolio (PRF) in December 2005. A U.S. equity fund, PRF is one of 28 equity funds PowerShares developed using the RAFI methodology. PRF, the largest of the suite, has $2.31 billion in assets.
The RAFI-based funds sponsored by PowerShares include 28 ETFs focused on equities, and four on fixed income. The Wheaton, Ill.-based fund sponsor also singled out the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ), which has $665 million in assets.
The company said both strategies have outperformed competing market-cap-weighted indexes in the past five years and since launch. The RAFI funds include ETFs tracking indexes in the U.S., Canada, Europe and in the emerging markets.
The RAFI fundamental index methodology takes book value, cash flow, sales and dividends into account when weighting the constituents in an index. This multifaceted weighting scheme—abandoning the singular focus on share price that characterizes traditional cap-weighted indexing—produces what PowerShares said was a “more robust means of capturing a company’s true economic footprint.”
The RAFI methodology, created by Rob Arnott, competes with other fundamental indexing approaches from WisdomTree Investments and RevenueShares. Additionally, Charles Schwab is on the verge of bringing to market six fundamental ETFs using a slightly different version of Arnott’s methodology that is branded as Russell, as opposed to FTSE RAFI, as is the case with the PowerShares suite.
PowerShares is the No. 4 U.S. ETF sponsor, with total assets of $85 billion, according to IndexUniverse’s latest “ETF League Table.” WisdomTree is the No. 5 sponsor, with a bit more than $30 billion in assets. RevenueShares has slightly more than $540 million.
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