Fundamental Index Returns For 15 Years

Hey, if the Discovery Channel can have “Shark Week”, I can have “Returns Week”! :)

I’m sure there may be many readers who aren’t all that excited about chart after chart, but I know there are those of you out there who eat this stuff up too, so enjoy. As a disclaimer, I work for a firm that offers fundamental index funds so recognize my conflict of interest (and also hopefully recognize that I’m not trying to push this stuff down your throat either, hopefully my presentation of such material isn’t too aggrandizing). For a primer on the Fundamental Index methodology, click here.

Fundamental Index Calendar Year Returns From 1994 to 2008

FTSE RAFI Canada Total Return Index FTSE RAFI US 1000 Total Return Index (CAD) FTSE RAFI Global ex-US Total Return Index (CAD) FTSE RAFI Emerging Markets Total Return Index (CAD) FTSE RAFI Hong Kong/China Total Return Index (CAD)
1994 5.09% 6.12% 19.63% 18.73% -23.66%
1995 15.94% 33.59% 8.58% -23.01% 15.96%
1996 36.33% 22.55% 11.33% 20.19% 36.22%
1997 35.74% 39.32% 5.87% 10.97% -21.11%
1998 5.20% 29.84% 28.65% 1.41% -7.09%
1999 26.52% 4.00% 25.87% 62.72% 41.76%
2000 30.93% 15.01% 0.35% -17.64% -4.41%
2001 2.11% 8.10% -11.16% 13.31% -1.12%
2002 -11.93% -18.50% -11.63% 0.87% -8.29%
2003 31.82% 9.57% 18.78% 53.53% 30.81%
2004 14.50% 6.92% 13.84% 24.43% 16.13%
2005 23.30% 2.81% 12.03% 37.46% 10.37%
2006 17.41% 19.64% 29.20% 40.54% 38.66%
2007 8.29% -12.62% -2.94% 22.99% 30.40%
2008 -31.15% -25.67% -30.50% -37.16% -35.40%

And again, I’m sure most will want to compare this to the traditional cap-weighted index returns so the below chart does that (and yes, I’m using the cap-weighted TOTAL returns indices). The numbers below are the excess returns of the FTSE RAFI indices over the cap-weighted indices.

Canadian Market US Market Foreign Developed Markets Foreign Emerging Markets Hong Kong China Market
1994 5.27% -1.13% 5.68% 20.63% 1.08%
1995 1.41% -0.31% -0.25% -15.27% -3.34%
1996 7.98% -0.79% 3.81% 13.83% 2.73%
1997 20.76% 0.20% -1.12% 18.74% -1.12%
1998 6.78% -8.52% 8.18% 21.07% -11.57%
1999 -5.19% -9.68% 35.69% 6.43% -8.06%
2000 23.52% 20.62% 16.62% 10.30% 7.05%
2001 14.68% 14.52% 5.01% 9.63% 12.45%
2002 0.51% 4.21% -26.15% 7.61% 10.14%
2003 5.10% 4.32% 6.25% 25.71% 17.85%
2004 0.02% 3.67% 2.49% 7.14% -0.26%
2005 -0.83% 1.19% 0.68% 7.14% 5.38%
2006 0.15% 3.89% 3.01% 8.00% 8.36%
2007 -1.54% -2.08% 1.31% 4.46% 10.68%
2008 1.85% -3.71% -0.82% 4.84% 4.15%

Since the cost of tracking a fundamental index is roughly 40bps more in management fees than a cap-weighted index tracking fund (currently), and if you are generous and assume double the portfolio turnover from about 6% to 12% resulting in slightly less tax efficiency then perhaps any year above with a positive performance of more than 0.75% could be considered a “win”. You’ll note that the less efficient markets (ones susceptible to bigger and more frequent pricing bubbles) look particularly attractive for fundamental indexation. This might be made more clear by reading this previous post about how cap-weighting magnifies your overpricing errors and reduces your underpricing errors.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 3 comments
  • Silicon Prairie

    That’s interesting comparison, although 15 years is a fairly short period. Do you have the total returns for each category over that time?

  • Preet

    @ Silicon Prairie – yes here are the numbers (category, RAFI total return, cap weighted total return) all annualized for the 15 years ending Dec 31 2008:

    Canada 12.38% vs 7.09%
    US 7.83% vs 5.90%
    Foreign Developed Markets 6.52% vs 2.63%
    Foreign Emerging Markets 11.90 vs 2.18%
    Hong Kong China 5.16% vs 1.33%

    Agreed 15 years is not enough data. I have data going back to 1962 for FTSE RAFI US, its annualized outperformance over the S&P500 is 2.0% from Jan 1 1962 to Dec 31 2007. (0.7% in bull markets and 5.8% in bear markets during this period)

  • Silicon Prairie

    Thanks – the past performance sounds pretty good :)