A comparative analysis of alternative indexing strategies in an Emerging Equity Market

Abstract

This study evaluates the performance of alternative fundamentally weighted (FW) portfolios compared to traditional capitalization-weighted (CW) portfolios using secondary data from July 2000 to June 2024. For this purpose, monthly indexes were constructed using fundamental metrics such as net income (NI), earnings before interest and taxes (EBIT), book-value + intangibles (BV+I), cash flows (CF), and dividends (D) along with a composite (COMP) index using both latest & moving average (5-year) values. Moreover, Sharpe, Treynor, and Sortino ratios are used with regression considering various asset pricing models to investigate return-generating attributes of FW portfolios. The descriptive and risk-adjusted measures indicate that CW dominates all the alternative FW portfolios over a full-sample period July 2000–June 2024. However, the COMP index consistently outperforms the CW from July 2000 to June 2008 & July 2014 to June 2019, suggesting alternative FW strategies may be more effective during periods of market instability. Hence, this study presents alternative FW indexation as a practical strategy during times of economic chaos only, offering a higher risk-return trade-off by mitigating the impact of noisy prices. It uniquely contributes to the scarce literature by constructing more mean-variant efficient portfolios based on fundamental metrics in Pakistan’s equity market.

Keywords: Fundamentally-weighted (FW) index, Capitalization-weighted (CW) index, Mean-variance efficient portfolio