The eRAFI™ Financial 15 Index ETF is compiled using the innovative enhanced Research Affiliates Fundamental Index™ (eRAFI™) approach to portfolio construction pioneered by California-based Research Affiliates. The methodology weights shares based on fundamental valuation metrics - sales, cash flow, book price and dividends, as well as two additional filters (the quality of earnings screen and the financial distress risk screen) - rather than traditional market capitalisation.
The eRAFI™ Financial 15 Index ETF in the NewFunds Collective Investment Scheme, is a portfolio of Constituent Securities held with the objective of tracking the eRAFI™ Financial 15 Index. The index is comprised of securities in the 15 companies with the largest fundamental value, selected from a universe of the financial sector companies that fall within the top 100 companies listed on the JSE, as measured by market capitalisation.
The enhanced Research Affiliates Fundamental Index™ (eRAFI™) approach overcomes the typical problems associated with ETFs that use the market capitalisation method of indexing, which over-weights stocks that are overvalued in the market and under-weights stocks that are undervalued – the opposite of good investment practice.
RAFI® strategies have statistically outperformed cap-weighted index strategies by more than 2.5% per annum in over 23 mature international stock markets, and significantly higher in emerging markets.