However, the method is in practice very similar to the so-called Core Equity Strategy-method launched by Dimensional Fund Advisors (DFA) during the same year.
Furthermore, fundamental indexation is also seen by some people as merely a practical application and repackaging of the findings of one of the most famous journal articles in modern financial economics: "The Cross-Section of Expected Stock Returns" by Fama & French (1992).
If we assume no correlation in line with Robert Arnott, this arguably prevents fundamentally based indices from participating in bubbles and crashes and thus reduces its volatility while delivering a higher return.
[2] If the assumptions of the Capital Asset Pricing Model (CAPM) do not hold then there could be three states of the world in line with the so-called joint hypothesis problem explained by Campbell (1997):[8] If we assume that the capitalization-weighted market portfolio is not efficient, assuming a pricing inefficiency, capitalization-weighting might be sub-optimal and the degree of sub-performance might be proportional to the degree of random noise.
[3][10][11] Forty years of back-tested Indices weighted by any of several fundamental factors including sales, EBIT, earnings, cash flow, book value, or dividends in U.S. markets outperformed the S&P 500 by approximately 2% per annum with volatility similar to the S&P 500.
Second, even after controlling for data snooping biases and the value premium, they find evidence that fundamental indexing produces economically and statistically significant positive alphas.
[14] Since the first research was disseminated, fundamentally based indices have been criticized by proponents of capitalization weighting including John Bogle, Burton Malkiel, and William Sharpe.