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Getting the cap out the weight

Some of the problems with market capitalisation-weighted index funds raised in this report are overcome by enhanced index ETFs – represented on the JSE by the Satrix Rafi ETFs and the NewFunds eRafi ETFs.

Rafi means “research affiliates fundamental index” – a technique developed in the United States that avoids market cap bias and seeks to outperform the index.

That’s done by weighting shares in the respective index according to other financial metrics, such as turnover, cash flow and dividends.

Much like an active manager, the manager of a RAFI or eRAFI ETF will try and beat the index using that different investment process: that is, quantitative analysis (“quants”) models and computer programmes.

 - Finweek

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