“The growth in these strategies began in big institutions seeking index-based exposure but not seeking it in traditional fashion,” Davidow says. “More recently, with the proliferation of ETFs, a lot more individual investors and advisors have been using fundamental strategies in a larger way.”
Davidow cites Schwab research that shows that 60 percent of RIAs plan to invest in fundamental index strategies, and nearly a quarter of RIAs plan to increase their allocation to fundamental strategies.
“ETFs are elegant building blocks and they are good ways to access markets in an efficient fashion,” Davidow says. “They’ve been embraced by advisors because they make it easier for them to build portfolios.”
But fundamental indexing isn’t a panacea – during extended boom periods like the tech bubble, when valuations become elevated, fundamental indexing tends to lag behind market capitalization.
“In those environments, it’s challenging for fundamental indexing to perform as well. There are periods where fundamental indexing will lag,” Davidow says. “There’s a role for both. They’re better together and they naturally complement each other.”
Davidow promotes an approach to portfolio allocation that places fundamental indexing among other strategies.
“We’re not saying that there aren’t other good strategies. We’re saying that they’re different,” he says. “We’re trying to educate inevstors so that they can make better-informed decisions. More choices are good, but it also increases the need for better understanding and education”