Key Points

• By design, the structure of traditional cap-weighted index causes a well-known tendency to buy high and sell low but also an underrecognized propensity for flip-flops.

• Addition and deletion flip-flops add up to a shockingly costly drag on performance.

• While the math behind cap weighting is sound, the costly flaws call for a smarter way to capture the market that avoids chasing exuberance and dumping despair.

• The RACWI US Index is designed to address these deficiencies by changing how stocks get selected.

• Rather than chasing price momentum or reacting to market noises, RACWI anchors index inclusion to a company’s real economic footprint.

• RACWI US aims to retain the efficiency and transparency of indexing without the structural drawbacks of procyclical rebalancing, thereby adding meaningful value over time.

There has not been a fundamental innovation in broad-market cap-weighted indexing in decades. Until now. With the Research Affiliates Cap-Weighted Index (RACWI), we introduce a fresh approach designed to fix a costly but little-known “bug” in cap-weighted indexing.