When Research Affiliates launched the RACWI US ETF (ticker: RAUS), the move carried weight. Rob Arnott, Founder and Chairman of the Board of Research Affiliates, has spent decades dissecting the flaws in cap-weighted benchmarks. Yet the new ETF is not a rejection of cap weighting but a reimagination of how it can work better. For advisors accustomed to thinking about the Vanguard S&P 500 ETF (VOO) and SPDR® S&P 500® ETF Trust (SPY) as the default building blocks of equity portfolios, RAUS seeks to offer something both familiar and differentiated.
In an interview with The Wealth Advisor’s Scott Martin, Arnott explains why RAUS belongs in the conversation. “Who would’ve thought that it would make any sense at all in crowded space with established multi-trillion-dollar players to come in and say, ‘Hey, I’ve got a better cap weighted index, and why don’t you give it a try?’ But that’s the choice we’ve made, and I couldn’t be more excited.”
The Hidden Activity Behind “Passive” Indexing
Cap-weighted indexes are often described as the ultimate passive strategies, but Arnott argues there’s more going on under the surface. Traditional benchmarks such as the S&P 500 and Russell 1000 keep turnover relatively low—at about 4–5% a year—but even that small slice of activity can introduce meaningful distortions.
“Stocks are added to the index at an average of twice the market multiple. Those replace companies that are dropped at half the market multiple. You’ve got a four-to-one valuation difference between the additions and the deletions,” Arnott explains. In other words, new constituents tend to be expensive momentum names while the companies kicked out are usually trading at steep discounts.
The result, he says, is anything but passive: “The active portion of the S&P or the Russell looks like a wild-eyed emerging growth manager on mega vitamins.” The pattern amounts to buying at highs and selling at lows—exactly the opposite of what long-term investors want. For advisors, that means understanding the hidden costs of index maintenance is just as important as evaluating headline fees or tracking error when selecting core equity exposures.
Why RAUS Exists
Traditional cap-weighted indexes assign weights based purely on stock price. The process ensures representation for the largest public companies but also creates inefficiencies, as cap weighting embeds a bias toward buying stocks after they’ve bolted ahead and selling them after they’ve tumbled.
Research Affiliates’ original solution was the RAFI Fundamental Index, which selects and weights companies by fundamental size measures rather than price. “Instead of indexing to the market, you’re indexing to the macro economy,” Arnott says. The approach creates what he calls a “stark value tilt,” trimming stocks whose prices have soared ahead of fundamentals and leaning into companies trading at discounts.
But over time, the team identified a second structural issue: how cap-weighted indexes decide which companies make the cut. The result is a structural buy-high, sell-low cycle that undermines long-term returns. Research Affiliates began studying the problem in detail, publishing its 2018 paper Buy High and Sell Low with Index Funds. From that research, a simple idea emerged: what if the firm applied RAFI’s fundamentals-based selection to determine which companies belong in an index, but then weighted those companies by market cap?
That’s the foundation for RAUS. By filtering index membership through measures including adjusted sales, cash flow, dividends plus buybacks, and book value plus intangibles, the strategy aims to keep the familiar structure of cap weighting while avoiding the costly churn of momentum-driven additions and deletions.
A Different Approach to Index Membership
RAUS addresses the selection flaw Achilles heel through its underlying benchmark, the Research Affiliates Cap-Weighted Index (RACWI). Instead of allowing price alone to determine index inclusion, RACWI screens companies by their economic footprint—adjusted sales, adjusted cash flow, dividends plus buybacks, and book value plus intangibles. After selection, the companies are cap-weighted, so the resulting index looks and behaves much like the S&P 500 but with a crucial distinction: the selection process filters out some inefficiencies to focus on businesses that matter economically rather than stocks riding momentum.
“We’re buying companies, adding companies that have edged into the top 500 of the top 1,000 by economic footprint, and we’re dropping companies that are no longer big enough to really matter,” Arnott says. Ultimately, the measured methodology aims to avoid knee-jerk additions and deletions, seeking to reduce the feverish “flip-flop” behavior that has historically hurt index investors.
The Problem of Flip-Flops
Flip-flops occur when an index adds a company at peak enthusiasm, only to remove it a few years later at a steep loss. Research Affiliates studied decades of index data, finding that more than half of discretionary deletions from the S&P 500 and Russell 1000 were companies added less than 10 years prior. Over one-third were added less than five years before being removed.
The pattern can be costly. “If you’re up 75 and then down 70, you’re not back where you started; you’re down 50%. So, you miss the upside,” Arnott points out. “You participate in the downside, then you get out. That’s the nature of flip-flops—and over half of the deletions in the market are flip-flops.”
By anchoring index membership to fundamentals rather than momentum-driven valuations, RAUS seeks to sidestep this recurring challenge.
Familiar Structure, Subtle Improvements
The beauty of RAUS lies in its subtlety. Advisors do not need to rethink portfolio construction to integrate the strategy. With more than 95% overlap in holdings with the S&P 500, RAUS behaves much like the benchmarks advisors and clients already understand.
Ultimately, the philosophy behind RAUS is one of restraint. “Don’t buy stocks just because they’ve soared; don’t sell stocks just because they’ve tanked,” observes Arnott. “Use a more measured, patient approach. Wait until the business success ratifies the earlier surge in price.” He acknowledges that the strategy might not catch some rallies from the beginning—”Yeah, you’re going to be a little late to the game with a Tesla or an Nvidia,” he says—but it also aims to avoid costly reversals when hype fades.
RAUS in Advisor Portfolios
For advisors considering RAUS, the natural question is where it fits. Arnott views the strategy as more than a satellite allocation. “I think core satellite is a good general model. This is a better core,” he says. With RAUS designed to preserve the scalability and familiarity of cap weighting, it can serve as a direct substitute for traditional index exposures, potentially offering an edge through more disciplined index maintenance.
Importantly, RAUS is not positioned as a wholesale replacement for entrenched index-tracking vehicles such as VOO or SPY. Arnott himself says he would never advise investors to sell long-held positions and trigger capital gains taxes. Instead, he sees RAUS as an option for new allocations—”every new dollar you’re thinking of putting into an index, why not buy RAUS?”
Zero Fees for Early Adopters
In an unusual move, RAUS launched with a zero expense ratio for its first year. Arnott describes the decision as a way to thank early adopters, recognizing that the concession may not be sustainable indefinitely. Still, the gesture signals Research Affiliates’ confidence in RAUS as a long-term proposition and the firm’s desire to lower barriers for advisors to test the strategy in practice.
While zero fees grab attention, RAUS’s design is its the long-term differentiator. With index funds priced at razor-thin margins, the more durable advantage comes from the strategy’s methodology. RAUS aims to provide exposure that maintains the efficiency of cap weighting while mitigating some of its most persistent flaws.
A Potential Long-Term Shift
Arnott does not expect overnight transformation of the indexing world, seeing change as gradual, driven by evidence and experience. “I think this is the most important innovation in indexing in decades,” he says. “And roll the clock forward 20 years, I think it’ll be co-equal with S&P and Russell as a dominant player. It’ll take time.”
For now, RAUS is a new entrant in a space dominated by incumbents. But the case it makes—offering something nearly identical in structure yet different enough to create potential for improved outcomes—might give advisors a compelling reason to consider it.
A Practical Innovation for Advisors
At its core, RAUS is not promising a radical departure from what advisors already know. The ETF seeks to deliver the same scalable, low-turnover exposure that makes cap weighting so widely used. The difference comes from how companies are chosen in the first place, aiming to remove costly inefficiencies that have plagued traditional indexes.
“All we’re trying to do is buy at reasonable valuations, sell at reasonable valuations, and have lower turnover by not chasing the fad du jour,” Arnott says.
The launch of RAUS represents Research Affiliates’ latest attempt to rethink indexing in practical terms. By addressing the structural flaws embedded in traditional benchmarks, the ETF seeks to offer advisors a way to maintain market-like exposure while reducing the hidden costs of momentum-driven index maintenance.
In a marketplace where innovation often comes with added complexity, RAUS is striking in its simplicity. It aims to look and behave like the indexes advisors already use, but its methodology reflects decades of research into how markets work and where investors are most vulnerable. For advisors weighing core building blocks in client portfolios, RAUS presents a differentiated option—one that seeks to buy and sell with patience, discipline, and an eye toward long-term stability.
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