FTSE RAFI US 1000 Index: How It Works and What to Know

The FTSE RAFI US 1000 Index takes a different approach to weighting companies, prioritizing financial strength over market capitalization. Instead of emphasizing stock prices, it selects and ranks companies based on fundamental business metrics to reflect a company’s true economic impact rather than investor sentiment.

Index Construction

The index evaluates companies using financial measures such as total cash flow, book value, dividends, and sales. These metrics highlight firms with strong financials rather than those potentially overvalued due to speculation.

Each company receives a fundamental score based on these criteria, determining its position in the index. This methodology reduces the influence of short-term market fluctuations and emphasizes long-term business performance.

Eligibility Criteria

To be included, a company must be listed on a major U.S. stock exchange, such as the NYSE or Nasdaq, ensuring compliance with financial regulations and transparency in reporting.

The index also requires a minimum average daily trading volume to ensure liquidity. Companies undergoing bankruptcy or classified as shell entities—those existing primarily on paper without significant operations—are excluded to maintain the integrity of the index.

Weighting Method

Instead of stock prices, the index assigns weightings based on financial strength. Companies are evaluated using a composite score derived from total revenues, retained operating cash flow, and aggregate dividends paid over a specified period.

Each company’s weight is proportional to its total fundamental value relative to all firms in the index. This prevents any single stock from dominating due to short-term price surges and allows financially strong companies with modest market capitalizations to receive greater representation than they would in traditional indexes.

Rebalancing Process

The index undergoes an annual rebalancing to reflect changes in corporate financial performance. Companies with improving fundamentals receive higher weightings, while those with weakening financials are reduced or removed.

Each rebalance begins with a reassessment of financial metrics based on updated corporate reports. Adjusting on a set schedule rather than reacting to market movements helps the index avoid momentum-driven fluctuations and ensures changes are based on financial strength.

Sector Distribution

The index does not impose sector constraints, allowing industry representation to be determined by company fundamentals. This can lead to sector weightings that differ from traditional market-cap-weighted indexes.

Industries with stable cash flows, such as consumer staples, healthcare, and utilities, often receive higher weightings due to consistent revenue and dividend payouts. In contrast, sectors like technology and biotechnology, which are more volatile, may have lower representation if their financial fundamentals do not support higher weightings. This results in a more value-oriented sector composition, emphasizing profitability over speculative growth.