Focusing on Growth (Not Market Cap)

Traditional market-cap-weighted indexes, such as the S&P 500, create excessive market concentration and heightened risk by over-weighting a handful of expensive stocks. To address this, Rob Arnott, founder of Research Affiliates, introduces the Research Affiliates Growth Index, which shifts the focus from valuation to fundamental growth metrics. This index selects constituents based on consistent increases in sales, profits, and R&D spending, while weighting them by their absolute dollar contribution to economic growth. This methodology avoids the pitfalls of price-based weighting and has historically outperformed the Russell Growth index by 4.5% annually over three decades. By prioritizing companies that drive actual economic expansion rather than those with high market valuations, this approach offers a more robust alternative for investors seeking to mitigate the risks associated with current market concentration.