I explained how fundamental index funds work, and how they can outperform regular index funds. But how much do they outperform by? Are they worth the extra MER premium compared to regular index ETF’s? Does the strategy of indexing based on fundamental factors instead of market capitalization really work?
Hopefully, this article will answer some of those questions.
According to pro financial asset management, below are the annualized returns of various indexes between Dec 1984 to Dec 2005:
|Rank||Country||Fundamental Index||Regular Index||Difference|
To put it in perspective, if you invested $50,000 20 years ago in a regular Canadian index fund, it would be worth around $361,048 (not counting inflation). Decent right?
However, if you invested the same $50,000 with a Canadian fundamental index fund 20 years ago, it would be worth $639,399 (not counting inflation). This represents a 77% overall difference in account size and a compelling argument for the fundamental indexing strategy.
This also goes to show how much a couple of percentage points can add up over the long term which is also the reason why you want to keep your MER’s as low as possible.
A couple notes about the table above, the returns are the pure index and the not the funds themselves. To appreciate what a fund would return, the MER and tracking error would have to be accounted for. Also past performance does not indicate future returns.
What are your thoughts on the fundamental index funds/ETF’s? Do you own any of them?If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).