Abstract
Fundamental indexing is a new trend that is gaining popularity in the financial community. As opposed to the traditional price and market-cap weighted indexes that most people are familiar with, fundamental indexes use various performance and valuation metrics such as sales, dividend yield, and the P/E ratio to select and weight their components. This method of indexing has gained popularity in recent years from its ability to produce “smarter” indexes whose rules-based methodologies somewhat mimic the logic that investment professionals use when choosing stocks for their portfolios. This article will focus on a comparison of the Dow Jones Global Select Dividend IndexSM and the Dow Jones STOXX® Select Dividend 30 Index, both of which are fundamental indexes, selected and weighted according to their respective dividend yields1. Throughout the article, we will discuss the similarities and differences in the methodologies of these two indexes, as well as the diversification advantages and disadvantages of each. However, before exploring each of these topics, it is essential to first explain why companies choose to pay dividends as well as the underlying premise behind dividend indexes.
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