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. Index Investing

    A form of passive investing that aims to generate the same rate ...
  3. Total Return Index

    A type of equity index that tracks both the capital gains of ...
  4. S&P Phenomenon

    The tendency for a stock that has been recently added to the ...
  5. Indexation

    Linking adjustments made to the value of a good, service or other ...
  6. Arithmetic Index

    An index of securities that uses an arithmetic sum to determine ...
Related Articles
  1. ETFs & Mutual Funds

    3 Types Of Indexing For ETF Success

    ETF success relies on the index with which it's paired. Discover three index genres for tracking average market performance.
  2. Markets

    Understanding Capitalization-Weighted Indexes

    A capitalization-weighted index is a market index whose individual components are weighted according to their market capitalization.
  3. Managing Wealth

    Choosing The Right ETF Index To Reach Your Goals

    The key to choosing ETFs for your portfolio is understanding how they pick stocks and making sure their investment philosophy matches yours.
  4. ETFs & Mutual Funds

    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 ...
  5. ETFs & Mutual Funds

    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.
  6. ETFs & Mutual Funds

    What is an Index?

    An index is a statistical means of calculating a change in an economy or market.
  7. Markets

    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. ETFs & Mutual Funds

    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.
  9. Markets

    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 ...
  10. Markets

    Standard And Poor's 500 Index

    Learn about this index of index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors.
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. 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 >>
  5. 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 >>
  6. What is a capitalization-weighted index?

    Learn about a capitalization-weighted index and how to calculate the value of a capitalization-weighted index through a simple ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center