Understanding macroeconomic trends, company fundamentals, and more are always crucial for performing well in the market. However, it’s also important to have a good grasp on investor behavior.
Rob Arnott, founder & chairman of Research Affiliates, took part in a session at Exchange 2026 to discuss this, his views on growth opportunities, and more. Roxanna Islam, CFA, CAIA, head of sector & industry research at VettaFi, moderated the session.
Diving Into Disconnections
To begin, Islam asked Arnott where he sees the largest disconnect between prices and fundamentals in the market, given all the moving parts at the moment. Looking broadly, Arnott cited a few areas where he sees disconnection.
In particular, Arnott observed a disconnection between the U.S. and non-U.S. investments, along with disconnections between growth and value, and large- and small-caps. Going further, Arnott cited inflows into large-cap U.S. indexes as a key driver behind these disconnections.
“Indexing isn’t as popular overseas, and the flow of money into large-cap U.S. index funds drives a wedge in valuation between the members of the index and the non-members,” Arnott added.
The Indexed Approach
Moving on, Islam asked Arnott about the RAFI Fundamental Index strategy. Noting that Arnott has been applying the core principles of this index in recent years, Islam asked him to explain how it works and how this approach could appeal to investors.
Arnott highlighted that this index blends fundamental indexing with fundamental weighting. He explained the fairly straightforward fundamental. When a stock soars, it gets bought, but if it craters beyond a certain threshold, it gets sold. Arnott explained that by focusing on stocks with fundamentals that justify these price rises, while selling out when the fundamentals sour, one can avoid much of the blowback from market flip-flops.
The Power of Fundamental Growth
As Arnott elaborated, applying this approach to growth strategies means focusing less on what is an expensive stock and instead drilling in on the dollar magnitude of that growth. Following up, Islam asked Arnott how investors should be viewing growth approaches instead of solely buying what is expensive at the time.
“What’s expensive isn’t growth,” Arnott explained. ”What’s expensive is expensive. A lot of them are growth, but a lot of them are not.”
As an example, Arnott discussed the RAFI Fundamental Growth Index, which focuses on true growth in lieu of buying the popular and pricy companies. In the index, the top two names are Apple and Nvidia, due to their rate of growth. However, not every member of the Magnificent Seven has made the cut. In this instance, Amazon and Microsoft were left out, despite being household names in other growth approaches.
“Amazon and Microsoft — they were both stupendous growers in the 2010’s,” Arnott noted. “They’re both nice, solid growers in the 2020’s. And the implication of that is, ‘oh, they’re second quartile growth rate.’ That’s very nice, but it’s not big enough to make the cut for our index.”
Originally published on ETF Trends
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