Fundamentally Weighted Index

What is a 'Fundamentally Weighted Index'

A fundamentally weighted index is 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.

RELATED TERMS
  1. Weighted Average Market Capitalization

    A stock market index weighted by the market capitalization of ...
  2. Capitalization-Weighted Index

    A type of market index whose individual components are weighted ...
  3. Index Investing

    A form of passive investing that aims to generate the same rate ...
  4. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
  5. Total Return Index

    A type of equity index that tracks both the capital gains of ...
  6. Standard & Poor's 500 Index - S&P ...

    An index of 500 stocks chosen for market size, liquidity and ...
Related Articles
  1. Markets

    Understanding Capitalization-Weighted Indexes

    A capitalization-weighted index is a market index whose individual components are weighted according to their market capitalization.
  2. Mutual Funds & ETFs

    Index Investing: What Is An Index?

    An index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market. It would be too difficult to track every single security trading in the ...
  3. Investing Basics

    What is an Index?

    An index is a statistical means of calculating a change in an economy or market.
  4. Mutual Funds & ETFs

    Strategies For Determining The Market's True Worth

    Learn the strengths and weaknesses of passive and active management when trying to uncover the overall market's worth.
  5. Professionals

    Average Market Returns

    We look at the major indexes and their average yearly returns.
  6. Investing Basics

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
  7. Options & Futures

    Using Index Futures To Predict The Future

    Want to know whether the stock market will open up or down? Check out the index futures.
  8. Investing

    Top Reasons Stock Indices Could Be Biased

    Do the owners of the large stock indices (McGraw Hill Financial, CME Group, and News Corp) have incentive to pick stocks to put in the index that are "shiny" as a marketing ploy? And if so, wouldn't ...
  9. Mutual Funds & ETFs

    Index Investing: Conclusion

    We hope this tutorial has given you insight into how you can track the market, use it as a benchmark and make investments. Some points to remember: An index is a statistical measure of the changes ...
  10. Mutual Funds & ETFs

    Measuring Performance

    Measuring Performance
RELATED FAQS
  1. How is the value of the S&P 500 calculated?

    The S&P 500 is a U.S. market index that gives investors an idea of the overall movement in the U.S. equity market. The ... Read Answer >>
  2. What are the pros and cons of using the S&P 500 as a benchmark?

    Learn about the advantages and disadvantages of using the S&P 500 as a benchmark for portfolio performance, and understand ... Read Answer >>
  3. What does the S&P 500 index measure and how is it calculated?

    Learn about what exactly the S&P measures and why it's used by market participants as a tool to understand the broader stock ... Read Answer >>
  4. Is it possible to invest in an index?

    First, let's review the definition of an index. An index is essentially an imaginary portfolio of securities representing ... Read Answer >>
  5. What are the most important equity market indexes?

    Discover the most important equity market indexes. Stock market indexes are tools to evaluate the performance of the stock ... Read Answer >>
  6. What is the difference between market capitalization and equity?

    Understand the difference between market capitalization and equity, two primary measurements used to evaluate the worth of ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center