Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.

This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.

Edition 83

Academic theory has cultivated a long standing tension between the trading price of a share and its intrinsic value.

The efficient market hypothesis argues that a company’s share price is the best estimate of its worth, as it reflects the collective judgement of millions. Therefore, if a share price incorporates all of the information available, allocating to companies by their market value is an entirely logical approach. This also implies that there is no case for trying to beat the market over the long-term.

In true academic fashion, not everyone agrees. One of the intellectual foundations of fundamental investing is the acknowledgement that while markets are generally efficient, there are certain times when investors can become overly optimistic or pessimistic. In such environments, prices can drift away from fundamentals.

Being a ‘fundamental investor’ revolves around the belief that the disconnect between a company’s share price and its fundamental value will eventually close. While differences can persist for long periods, the businesses who continue to generate strong fundamentals will ultimately see their share price catch up. Therefore, investors can buy companies that look undervalued and avoid the expensive ones.

This idea is often the premise behind active fund management. But many managers fail to achieve this over the long run, mostly due to a higher fee barrier detracting from total returns.

Another alternative is to design an index to do this job. Instead of relying on a fund manager’s discretion to pick winners and losers, the concept of fundamental indexing initially emerged as an attempt to separate portfolio construction from market sentiment. Different methodologies use different measurements, but the common principle is that weightings are based on metrics rather than market cap.

A fundamental index will systematically allocate to companies that show stronger fundamentals relative to their share price. In practice, this means they typically exhibit many of the same characteristics as traditional value strategies. In many ways, it may represent a middle ground between active management and traditional market-cap funds.

Betashares Australia 200 Fundamental Value ETF QOZ

  • Total Cost Ratio: 0.40%
  • Assets under management: 1.4 billion (AUD)
  • Morningstar Medalist Rating: Silver
  • Benchmark: FTSE Australia 200 Fundamental Value Index
  • Morningstar Category: Equity Australia Large Value

Composition

The Betashares Australia 200 Fundamental Value ETF QOZ is one of the most established examples of fundamental indexing available to Aussie investors. The fund aims to deliver cost-effective exposure to the largest 200 companies listed on the ASX.

Importantly, as of September 18, 2026, QOZ transitioned from tracking the FTSE RAFI Australia 200 Index to the FTSE Australia 200 Fundamental Value Index. But despite the benchmark change, the portfolio’s underlying characteristics remain consistent.

The FTSE Australia 200 Fundamental Value Index determines fundamental value using four measures: five-year average sales, five-year average cash flow plus capitalised R&D expense, five-year average dividends plus buybacks, and book value plus capitalised R&D. Companies are weighted according to their share of these measures across the investable universe. The index is rebalanced periodically, with liquidity caps and weighting constraints applied to limit excessive exposure to less frequently traded securities.

In plain terms, portfolio weights are driven by measures of a company’s economic footprint rather than its share price. This naturally creates a contrarian rebalancing effect where companies whose share prices have risen faster than their fundamentals tend to see their weights reduced.

One of the surprising aspects is that despite the fundamental screen, QOZ maintains significant exposure to many of the same companies that dominate traditional Aussie equity indexes. The fund’s active share is around 25%, meaning roughly three-quarters of the portfolio still resembles the broader market.

However, the differences emerge when we look at portfolio weights. Historically, the fund has maintained larger allocations to energy, materials and consumer defensive companies. Simultaneously, it has maintained lower exposure to areas of the market where valuations have become more stretched.

Compared with traditional market-cap weighted ETFs, fundamental indexing introduces several trade-offs. Because weights are tied to fundamental metrics rather than share prices, the fund generally requires more frequent rebalancing to maintain those allocations. This results in higher turnover with QOZ’s sitting around 9% of the portfolio, compared with roughly 4% for a broad Aussie ETF such as A200.

Additionally, Australia is already an unusually concentrated market dominated by financials and materials. While QOZ appears like it’s making a value bet, it is also doing so in a way that systematically overweights these sectors. As a result, there will likely be periods where sector allocation (rather than the fundamental methodology itself), has a meaningful impact on performance.

Performance and fees

As one can infer by the title of this article, long-term results have been strong for this fund. As of September 30, 2026, QOZ delivered an annualised 10-year return of approximately 10.5%. This means it outperformed both the category index and average peer, which returned roughly 9% and 7.5%, respectively.

The fund’s performance has generally been consistent with what investors would expect from a value-oriented strategy. Index-relative returns were strongest during periods when value stocks outperformed the broader market e.g. 2016, 2022 and 2025. Conversely, performance lagged during environments that favoured growth stocks, such as in 2020.

More recently, in the 12 months to September 30, 2026, QOZ has ranked among the category’s strongest performers, outpacing the ASX 200 by more than 10%. Our analyst believes the recent strength reflects both a favourable environment for value stocks and also solid returns from resource companies. Given the fund’s long-standing preference for materials exposure, and the tendency for many peers to avoid the sector on quality and predictability grounds, it has materially widened its lead.

Back-tested performance for the new benchmark has been closely aligned since the inception of the original RAFI index, indicating minimal impact on the portfolio’s overall risk profile or expected investor outcomes.

Performance alone shouldn’t necessarily be viewed as evidence that fundamental indexing is superior. Much of the excess return can be attributed to the persistent value tilt. This means you’re effectively making a factor bet that may or may not be rewarded in the future. The same characteristics that helped drive outperformance can also lead to years of relative underperformance if growth-oriented sectors return to favour in the domestic market.

QOZ occupies an interesting middle ground on fees. At 0.40% per year, it is considerably cheaper than its category median of 0.99% per year, yet meaningfully more expensive than plain-vanilla ETFs like VAS, A200 and IOZ. Ultimately, investors are paying extra for the fundamental-index methodology. The key question is whether the potential benefits justify that additional cost.

Concluding thoughts

I’m not personally convinced this is a story about replacing broad market exposure, regardless of what the performance data says. Instead, it poses the question as to whether market-cap weighting is neutral. Investors often treat benchmarks like the ASX 200 as though it represents the market in its purest form. However, it is just one approach to portfolio construction while QOZ represents another.

Over the past decade, QOZ’s methodology has produced stronger results, but it doesn’t guarantee the next decade will look the same. I think the most interesting thing about the fund isn’t that it beat the ASX. Rather, it is the premise that share prices and fundamental value are not always the same thing. In an age defined by AI enthusiasm, rising market concentration and seemingly unstoppable winners, it is something that every investor should be thinking about.

Get Morningstar’s insights in your inbox