More alternative indexes have been launched in the past few years and data shows that they are getting a significant portion of inflows, the WSJ's Andrew Blackman reported. According to BlackRock [profile], 43 percent of inflows into US equity ETFs in the first five month of this year went to products not weighed by market capitalization. Last year, the percentage was much lower, at 20 percent.

Critics of weighting stocks according to market caps say that an expensive stock can throw off the index, leaving the index's value vulnerable to big changes in just a few expensive stocks. Alternative indexes tend towards smaller-cap stocks and value-oriented shares, Blackman writes, which mostly outperform large-cap stocks in the long term.

The Cass Business School studied 13 alternative index methodologies would have performed from 1968 to 2011 and found the market-cap indexes generated 9.4 percent annualized return compared to other indexes, which brought in between 9.8 percent and 11.4 percent.

It's appealing for investors to use alternative index funds to outperform the market because expenses are lower than most actively managed funds, IndexUniverse's Matt Hougan said. Mutual funds tracking alternative indexes are available for those who don't mind paying higher expenses.

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Edited by: Casey Quinlan


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