The founder of Research Affiliates, Robert Arnott, argues that capitalization weighting (i.e., weighting by the market value of each company) implies that holders of such portfolios will always be holding too big a share of overpriced growth stocks. He avoids this so-called “inefficiency” by adjusting the weight of each stock to its economic footprint such as earnings, assets, and the like. He calls this “Fundamental Indexing.”
