Fundamentally Weighted Index


DEFINITION of 'Fundamentally Weighted Index'

A type of equity index in which components are chosen based on fundamental criteria as opposed to market capitalization. Fundamentally-weighted indexes may be based on fundamental metrics such as revenue, dividend rates, earnings or book value. Proponents of these indexes claim that they are a more accurate aggregate measure of the market because market capitalization figures tend to overweight companies that are richly valued while underweighting companies with low valuations.

BREAKING DOWN 'Fundamentally Weighted Index'

The downside to this type of index is that the line between passive management and active management can become blurred.

Some investors believe that market capitalization represents the fair value of a company's prospects, making it a neutral metric for index inclusion. The most well-known market capitalization weighted index is the benchmark S&P 500 Index. However, the S&P's poor performance during and after the bear market of 2001-2002 was a big impetus for the search for other methods of indexing the largest U.S. equities.

  1. Index

    A statistical measure of change in an economy or a securities ...
  2. Market Index

    An aggregate value produced by combining several stocks or other ...
  3. Passive Management

    A style of management associated with mutual and exchange-traded ...
  4. Price-Weighted Index

    A stock index in which each stock influences the index in proportion ...
  5. Standard & Poor's 500 Index - S&P ...

    An index of 500 stocks chosen for market size, liquidity and ...
  6. Active Management

    The use of a human element, such as a single manager, co-managers ...
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