Surging interest in next-generation exchange-traded funds is spilling into the more staid index mutual-funds marketplace, reports MarketWatch [via Hedgewire].
Charles Schwab & Co launched three open-ended mutual funds on Monday to track benchmarks based on valuation criteria that fund managers often use to pick stocks. The system differs from traditional benchmarking, which sticks to market capitalisation to weight holdings.
These so-called “fundamental indexes” were developed by Robert Arnott, chairman of California-based Research Affiliates, which has teamed up with index-provider FTSE Group to create and run the benchmarks for Schwab’s newest mutual fund offerings.
While ETFs are moving towards more flexible and active benchmarks, traditional mutual funds have largely relied on a rather simple formula. Namely, multiplying the number of outstanding shares by a stock’s price.
Critics maintain that can create a bubble effect in bull markets. When markets soar, so do index funds. But when markets sell-off, fund returns tend to sink proportionately.
Instead of weighting stocks by market capitalisation, Arnott’s process evaluates stocks on metrics such as book values, cash flow, sales and gross dividends.
The trio is the first set of mutual funds to hit the market for retail investors and advisors implementing such a fundamental methodology.