Fundamentally weighted vs Factor based weighted index

What is the actual difference between the two?

I just did a problem and I thought it is for sure fundamentally weighted, but the answer says its factor based

Which of the following index methodologies is most appropriate to use as a benchmark for the overall stock portfolio described in Pool 2?

Here is the problem.

The mandate of Pool 2 also consists of two primary goals:

  • A goal that the overall stock portfolio should consist of mature companies that have stable net incomes and high dividend yields
  • A goal of expressing strong views on many major corporate issues through proxy voting
  1. Factor based
  2. Capitalization weighted
  3. Fundamentally weighted

Fundamental generally means micro characteristics of a given firm: sales, gross profit, net profit, cash flow, P/E ratio, and so on.

Factor generally means characteristics of the overall economy – GDP, unemployment, interest rates, and so on – or macro characteristics of a given firm or its stock: large or small, growth or value, liquid or illiquid, and so on.

The first bullet point is definitely factor-based: they want value, not growth.


Fundamental weigh also has value tilt = is it only coz the first bullet point indicates portfolio screening for value (macro, not company specific), we go for factor based?

2nd point tilts my answer towards factor based index. Fundamentally is based on company’s individual measures such as GP margin %, NP % etc.

I really can’t make a distinction between the two not even after reading all the comments. I mean it says “mature companies that have stable net incomes and high dividend yields”… so they all lead me to choose fundamentals