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What are we looking for?

How the best U.S. equity funds have performed compared to the market index.

The screen

We looked for the top 15 performers among the hundreds of U.S. equity funds traded in Canada for the year ended Jan. 31. We wanted to see how this elite group fared in comparison to the S&P 500 Composite, in Canadian dollar terms.

U.S. dollar, segregated and duplicate versions of funds were excluded.

What did we find?

All 15 funds beat the S&P 500. Several of them share four other letters in common: RAFI.

Unlike the S&P, which weights stocks on the basis of their market capitalization, the Research Affiliates Fundamental Index (RAFI) methodology uses fundamental factors to select securities.

"These measures are less susceptible to gaming, rely on easily accessible data, and are broadly available across countries," according to Research Affiliates LLC, which holds a patent for fundamental indexing.

A RAFI strategy was what pushed the Blackrock iShares US Fundamental Index to the top of the screen with a 22.5 per cent gain for the year, compared to the S&P 500's 16.1 per cent advance.

The iShares RAFI Fundamental Index approach weights securities based primarily on four factors: sales, cash flow, dividends and book value.

"This strategy has a dynamic value tilt and a slight small-cap tilt," said Jeffrey Logan, head of iShares products at BlackRock Asset Management Canada Ltd. in an e-mail.

"This was once again a winning strategy over the past year."

The fundamental indexing strategy has outperformed the market-capitalization-weighted index three times in the past four years to Jan. 31, Mr. Logan notes.

Many of the top contributing individual securities in the stock breakdown of the index tracked by the iShares ETF are household names, including Apple Inc., McDonald's Corp. and Bank of America Corp.

Brandes U.S. Equity and PowerShares FTSE RAFI US Fundamental (CAD Hedged) ETF followed the top performer with gains, respectively, of 18.6 per cent and 18.4 per cent.

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