Fundamentally Weighted Index

A type ofequity indexin whichcomponents are chosen based on fundamental criteria as opposed to market capitalization.Fundamentally-weighted indexes may be based on fundamental metrics such as revenue, pidend rates, earnings or book value.Proponents of these indexes claim that they are a more accurate aggregate measure of the market because market capitalization figures tend to overweight companies that are richly valued while underweighting companies with low valuations.

Taobiz explains Fundamentally Weighted Index

The downside to this type ofindex is that the line between passive management and active management can become blurred.

Some investors believe that market capitalization repsents the fair value of a company's prospects, making it a neutral metric for index inclusion. The most well-known market capitalization weighted index is the benchmark S&P 500 Index. However, the S&P's poor performance during and after the bear market of 2001-2002 was a big impetus for the search for other methods of indexing the largest U.S. equities.