What Is FTSE RAFI U.S. 1000 Index?
The FTSE RAFI U.S. 1000 Index is a benchmark for the share prices of the largest 1,000 companies in the United States ranked according to certain fundamentals. The four fundamental factors are dividends, book value, sales, and cash flow.
Launched on Nov. 28, 2005 with a base value of 5,000, the index includes stocks that trade on the New York Stock Exchange (NYSE), Nasdaq, and American Stock Exchange (AMEX).
- FTSE RAFI U.S. 1000 Index is a benchmark for the performance of the largest 1,000 stocks that trade in the United States.
- Stocks within the index are selected and ranked based on four fundamental factors: sales, cash flow, operating income, and dividends.
- Stock prices or market values are not considered when computing the stock weightings within the FTSE RAFI U.S. 1000 Index, making it different from traditional market indexes like the S&P 500 or the Dow Jones Industrial Average.
Understanding FTSE RAFI U.S. 1000 Index
The FTSE RAFI U.S. Index is composed of 1,000 U.S. stocks that FTSE International Limited and Research Affiliates LLC (RAFI) identify based on strict guidelines and procedures. The index is designed to track the performance of the largest U.S. stocks based on four fundamental measures:
- Sales: company total sales averaged over the prior five years
- Cash Flow: company total free cash flows (FCF) averaged over the prior five years
- Operating Income plus Depreciation and Amortization Book Value: company book value at the review date
- Cash Dividends: total cash dividend distributions averaged over the last five years, including both special and regular dividends paid in cash
By focusing on fundamentals, the FTSE RAFI U.S. Index tries to reduce the index's exposure to overvalued stocks, which is especially true for stocks that have seen a seemingly unsustainable increase in price.
For example, the index will have less exposure to stocks that have experienced large increases in price compared to their earnings (called the P/E ratio). The lower exposure to high P/E ratio stocks differs from the market-capitalization-weighted index, which assigns weightings of index components by company size or market value.
The FTSE RAFI U.S. Index is one of FTSE’s range of non-market capitalization-weighted indexes. That is, while many indexes are created so that companies with larger market caps have a greater influence on the index, FTSE RAFI U.S. Index does not. Instead, the index is constructed using the Fundamental Index® methodology developed by Research Affiliates LLC of Newport Beach, Calif.
The index breaks with the traditional market cap-weighted design and instead uses the reported monetary values of cash flow, book value, total sales, and gross dividend to derive each constituent index weight. Prices, which change daily due to the ebbs and flows in the stock market, are not a component of the weights. By anchoring the index to economic or fundamental measures, the approach is not tied to the market’s constantly changing views, expectations, fads, bubbles, or crashes.
Likewise, exchange traded funds that follow the FTSE RAFI U.S. Index do not measure firm size by market capitalization. Instead, they hold stocks in large companies chosen and weighted by the four fundamental factors. While not a classic value fund, an ETF that tracks the index breaks the link between the price of a stock and its weight in the portfolio, aiming to hold stocks in proportion to the value of key fundamental factors, without giving greater weight to the priciest stocks.