RAFI ETF Investing: Q&A With Rob Arnott | ETF Database

When you think about capitalization weighting in stocks the drawbacks are fairly evident. When you talk about cap weighting in bonds, the drawbacks are flagrantly obvious.

With cap weighting, consider that Australia has three times the GDP of Greece, and Greece has three times the debt burden of Australia. Why should we want to own three times as much in Greek debt as Australian debt? In fact, Australia’s ability to service debt is at least three times that of Greece, and so wouldn’t it make more sense to have an index for bonds that weights countries’ bond debt in accordance with GDP and other measures of the economic footprint of a country?

via RAFI ETF Investing: Q&A With Rob Arnott | ETF Database.