What is FTSE RAFI US 1000 Index
The FTSE RAFI US 1000 Index is an index of stocks based on the largest 1,000 fundamentally ranked companies. The FTSE RAFI US 1000 Index was launched on November 28, 2005 as part of FTSE Group's non-market cap weighted stocks. The fundamental weighting factors include dividends, book value, sales and cash flow.
BREAKING DOWN FTSE RAFI US 1000 Index
The FTSE RAFI US Index tries to reduce the exposure to overvalued stocks. This is especially true for stocks that have recently seen a seemingly unsustainable increase in price. For example the index will have less exposure to stocks that have seen large increases in price compared to their earnings (called P/E ratio). This lower exposure is compared to a market-cap weighted index.
Investing in the FTSE RAFI US Index
There are multiple opportunities for investors and traders to invest in exchange-traded funds that follow the FTSE RAFI US Index.
ETF's that follow the FTSE RAFI US Index typically reject the idea of measuring firm size by market cap. Instead, they hold stocks in large companies chosen and weighted by book value, cash flow, sales and dividends. While not a classic value fund, these ETFs break the link between the price of a stock and its weight in the portfolio, aiming to hold stocks in proportion to firm size without overweighting the priciest stocks.
The FTSE RAFI US Index is composed of 1,000 U.S. stocks that FTSE International Limited and Research Affiliates LLC strictly in accordance with its guidelines and mandated procedures, include to track the performance of the largest U.S. equity stocks based on the following four fundamental measures: book value, cash flow, sales and dividends.
The FTSE RAFI US Index is one of FTSE’s range of non-market capitalization-weighted indexes. Using the Fundamental Index® methodology developed by Research Affiliates LLC of Newport Beach, California, the index breaks with the traditional price-based market cap weighted design, and instead derives its constituent weights from fundamental measures of company size. The methodology uses the reported monetary values of cash flow, book value, total sales and gross dividend to derive each constituent index weight. Prices, which can be prone to speculation, are not a component of the weights. By anchoring the index to economic measures, the Fundamental Index approach contra-trades against the market’s constantly changingviews, expectations, fads, bubbles, and crashes.
Fundamental Factors of the FTSE RAFI US Index
- Sales: company sales averaged over the prior five years.
- Cash Flow: company cash flow averaged over the prior five years, defined as
- Operating Income plus Depreciation and Amortization Book Value: company book value at the review date.
- Dividend: total dividend distributions averaged over the last five years,including both special and regular dividends paid in cash.