Fundamental Investing

RAFI Header Image – Expect More from Your Beta

Utilizing the RAFI® Fundamental Index® methodology developed by Research Affiliates, the Invesco FTSE RAFI Portfolios use four fundamental measures of company size; sales, cash flow, dividends and book value, to determine a stock's index weight.

The RAFI methodology assigns weights based on the economic size of a company and can help to reduce the performance drag caused by the overweighting of overvalued securities and underweighting of undervalued securities inherent in traditional market capitalization weighted indices, while still maintaining the benefits of traditional passive indexing, i.e. broad economic representation, high liquidity and capacity and low cost.

Cap-Weighted Strategy Fundamental Index Strategy Invesco ETF
Russell 1000 FTSE RAFI 1000 PRF – Invesco FTSE RAFI US 1000 ETF
MSCI EAFE Index FTSE RAFI Developed Markets ex-U.S. PXF – Invesco FTSE RAFI Developed Markets ex-U.S. ETF
MSCI Emerging Markets FTSE RAFI Emerging Markets PXH – Invesco FTSE RAFI Emerging Markets ETF
MSCI EAFE Small Cap FTSE RAFI Developed ex-U.S. Small-Mid PDN – Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid ETF
Russell 2000 FTSE RAFI U.S. 1500 Small-Mid PRFZ – Invesco FTSE RAFI US 1500 Small-Mid ETF
Past performance is not indicative of future results.
You cannot invest directly in an index.

We believe cap-weighted index strategies:

  • Incorporate analysts' optimistic growth projections
  • Use outdated research technology
  • Overweight overpriced stocks
  • Underweight underpriced stocks
  • Fully participate in market speculation
  • Are distorted measures of the economy
  • Display substantial growth bias

We believe the Fundamental Index strategy:

  • Uses fundamental variables that don't depend on the fluctuations of market valuation
  • May be less influenced by market bubbles
  • Seeks to avoid overweighting overvalued stocks — a potential with market-cap-weighted indexes
  • Provides an alternative to traditional market-cap-weighted indexes
  • Preserves the benefits of traditional passive indexing, i.e. broad economic representation, high liquidity and capacity and low cost.

The RAFI® approach is based on the premise that traditional indexes are flawed in the way they handle mispricing.

During the years leading up to the global financial crisis, financial companies like Wells Fargo and American Express traded on average at about 2.2x book value.

As the market bottomed in March 2009, financials traded at less than 0.5x book value before climbing back to pre-2009 levels.

The bursting of these bubbles offers evidence of the existence of mispricing. An index strategy that weights by non-price measures would have rebalanced into these financial stocks when their prices were low and their valuations were attractive.


Financial bubble visualized

Financial bubbles visualized chart

Source: Research Affiliates®, LLC and Factset, Dec. 31, 2010

In an effort to mitigate the effects of mispricing, the Fundamental Index methodology assigns weights to stocks based on four fundamental factors:

  • Book value
  • Trailing five-year average cash flow
  • Trailing five-year average sales
  • Trailing five-year average gross dividends

These are objective factors that exist independently of a stock's price and seek to provide metrics of size that are not swayed by the whims of the market.

Source: Bloomberg L.P.

General risk information

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.

Past performance is not indicative of future results.

The Funds may invest in small- and/or medium-sized companies. Investing in securities of small- and medium-sized companies involves greater risk than is customarily associated with investing in more established, larger sized companies.

Investments focused in a particular industry are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Trademarks & other information

Shares of the Funds are not in any way sponsored, endorsed, sold or promoted by FTSE International Limited ("FTSE") or by the London Stock Exchange Plc ("Exchange") or by The Financial Times Limited ("FT") or by Research Affiliates LLC ("RA"), and neither FTSE nor Exchange nor FT nor RA makes any warranty or representation whatsoever, expressly or implicitly, either as to the results to be obtained from the use of the Indexes and/or the figure at which the said Indexes stand at any particular time on any particular day or otherwise. The Indexes are compiled and calculated by FTSE in conjunction with RA. However, neither FTSE nor Exchange nor FT nor RA shall be liable (whether in negligence or otherwise) to any person for any error in the Indexes, and neither FTSE nor the Exchange nor FT nor RA shall be under any obligation to advise any person of any error therein. "FTSE" is a trademark of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under license. Fundamental Index®, Fundamentals Weighted® and RAFI® are trade names and patent-pending concept are the exclusive property of Research Affiliates® LLC.

The Russell 1000, Russell 1000 Value and Russell 2000 Indexes are unmanaged indexes considered representative of large-cap, large-cap value and small-cap stocks, respectively. The Russell Indexes are trademark/service marks of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.

FTSE RAFI Indexes are designed to track the performance of equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends.

Investors should be aware of the risks associated with data sources and quantitative processes used in our investment management process. Errors may exist in data acquired from third party vendors, the construction of model portfolios, and in coding related to the index and portfolio construction process. While Research Affiliates takes steps to identify data and process errors so as to minimize the potential impact of such errors on index and portfolio performance, we cannot guarantee that such errors will not occur.

"Fundamental Index®" and/or "Research Affiliates Fundamental Index®" and/or "RAFI" and/or all other RA trademarks, trade names, patented and patent-pending concepts are the exclusive property of Research Affiliates, LLC.

The MSCI EAFE, MSCI AC Asia Pacific ex-Japan, MSCI Emerging Markets and MSCI EAFE Small Cap Indexes are unmanaged indexes considered representative of stocks of Europe, Australasia and the Far East; Pacific region, excluding Japan; developing countries; and small-cap stocks of Europe, Australasia and the Far East, respectively.