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BetaShares launches fundamental index ETF on the ASX

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BetaShares has launched the first exchange-traded fund on the Australian Securities Exchange (ASX) to use a fundamental index methodology.

The BetaShares FTSE RAFI Australia 200 ETF will trade under the ASX Code “QOZ” and aims to provide an investment return that tracks the performance of the FTSE RAFI Australia 200 Index, before fees and expenses.
 
The ETF is designed to provide investors with exposure to the top 200 companies listed on the ASX, weighted in a way that is reflective of their economic footprint rather than their market capitalisation.
 
The index has been built using the RAFI Fundamental Index methodology developed and owned by Research Affiliates, which was founded in 2002 by Rob Arnott, and whose panel of advisers includes Harry Markowitz (Nobel Prize winner and father of modern portfolio theory), Jack Treynor and Burton Malkiel, author of one of the most respected books on investing, A Random Walk Down Wall Street.
 
This methodology aims to produce superior long term performance compared to traditional market cap weighted indices. It seeks to do this by improving on some of the limitations of market capitalisation based methodologies, while still maintaining the benefits of passive investment – lower turnover costs, broad economic representation and a transparent, rules-based process.
 
Rather than simply adopting market cap in order to weight constituents, the RAFI Fundamental Index approach uses four fundamental measures of company size to determine index weights. These four factors are cash dividends, sales, cash flow and book value.
 
“The problem with using market cap weighted indices for core broad market exposure is that security weights are linked to market price, so as the share price for a company increases, so does its index weight. This can lead to a performance drag deriving from overweighting overvalued securities and underweighting undervalued securities. By moving away from the market cap model, the FTSE RAFI Australia 200 ETF provides an intelligent alternative for Australian investors,” says Alex Vynokur, managing director of BetaShares. “Using market cap as a basis for weighting constituents is a methodology that has been in existence for well over a century. The RAFI methodology is a significant advance in the sophistication of index development, with a compelling track record when compared with traditional, cap weighted benchmarks.
 
“The launch of this ETF comes at a time when investors and financial advisers are increasingly scrutinising the costs and benefits of active fund managers. QOZ provides investors with exposure to a transparent, low cost and simple to implement strategy that can be used as a core portfolio allocation.” 

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