Masters in Business · Wednesday, September 2, 2026
Rob Arnott proposes fundamentally weighted indexes, which base stock weights on economic footprints like sales, profits, net worth, and dividends, as an alternative to market cap weighting. He argues this approach reduces the overweighting of frothy growth stocks and increases the weighting of unloved value stocks, leading to a stark value tilt.
“Let's suppose you want an index that studiously mirrors the economy instead of studiously mirroring the Market. Well, you wouldn't weight companies by market cap. You wouldn't choose them based on market cap. Let's choose them based on how big their business is.”
“How big are its sales? How big are its profits? How big is its net worth? Today, we would go a step further and say net worth adjusted for intangibles. How much does it distribute to shareholders in dividends and buybacks? Four different measures.”
“So you wind up with a stark value tilt. And that means the sensible way to measure RAFI, the fundamental index, is is to measure it against the value indexes. And that's where it gets really interesting.”