Fundamental indexation and international diversification

Just as fundamental indexation is novel and controversial, international diversification is traditional and widely accepted. In this article, the author links both issues and evaluates a fundamental strategy of international diversification. Considering 16 country benchmarks that make up over 93% of world market capitalization and a 32-year (1974-2005) sample period, the results show that a dividend-weighted fundamental index outperforms a cap-weighted index by the substantial margin of 190 bps a year. If, however, investors are willing to abandon cap-weighted portfolios, the results also show that a simple value strategy which weights the same country benchmarks by dividend yield outperforms the dividend-weighted fundamental index by 170 bps a year over the same period. All the strategies evaluated by the authors can be easily implemented with widely available low-cost country index funds and exchange-traded funds.