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Written by: Rob D. Arnott
For years, investors have accepted a strange paradox: the more expensive a stock is, the more likely it is to be labeled as “growth.” Traditional growth indices tend to lean into this logic by selecting companies based on lofty valuations, future expectations, and analyst enthusiasm.
But here’s the question: Why should price dictate what qualifies as growth?
At Research Affiliates, we think there’s a better way.
Redefining Growth the Fundamental Way
Our RAFI Fundamental Growth Index (RAFI Growth) takes a different approach. It selects and weights companies based on actual, observable, and measurable business growth by focusing on metrics like growth in:
- Sales
- Profitability
- R&D
In other words, RAFI Growth defines growth by what a business does, not what investors hope it might do.
Instead of letting price drive exposure, we anchor portfolios in real economic progress. If a company expands its footprint in the macroeconomy through higher revenues, stronger margins, or reinvestment in innovation, it can earn its place. If not, no matter how expensive or hyped it may be, we pass.
The Problem with Traditional Growth Indexing
Let’s be direct: Growth benchmarks can at times confuse “expensive” with “growing.”
This misalignment can lead to several issues:
- Concentration risk: The most richly priced names dominate index weights.
- Momentum bias: Stocks are added after large price run-ups, often just in time for reversals.
- Diluted growth exposure: Companies with minimal actual growth make the cut if their valuation is high enough.
In essence, these indices can tell us more about market sentiment than business fundamentals.
What Makes RAFI Growth Different
RAFI Growth is designed from the ground up to answer a simple question: Who is actually growing?
We measure this across multiple horizons (3-, 4-, and 5-year periods) to smooth out noise and short-term volatility. We then weight companies by the magnitude of their fundamental growth, not by their price or size. This aims to avoid glamour stocks that are expensive but stagnant, while recognizing firms making real economic contributions.
And the results speak for themselves. Over nearly three decades (when backtested*), RAFI Growth has consistently outperformed traditional growth benchmarks across regions, not through market timing or factor tilts, but through fundamental discipline.
This exhibit illustrates how RAFI Growth compounds to nearly three times the wealth of the CW Growth benchmark. This is evidence of what’s possible when growth is measured by real business expansion, not inflated valuations.
Magnificent by Market Cap ≠ Magnificent by Growth
Despite their dominance in headlines and indices, not all of the so-called “Magnificent 7” qualify as true growth companies (at least, not under our definition).
Microsoft and Amazon, which are represented in the Russell 1000 Growth Index by weights of 10.2% and 4.5% respectively (as of 12/31/25), are massive by market cap and often labeled as growth leaders. But under RAFI Fundamental Growth’s rules, they don’t make the cut. Why? Because they simply aren’t growing fast enough in the top quartile based on fundamental growth signals like sales, profitability, and R&D expansion.
This underscores a central point: expensive doesn’t mean growth. And large doesn’t mean fast-growing.
RAFI Growth doesn’t chase size or popularity. It selects firms that are actually expanding their economic footprint. From that lens, the “Magnificent 7” might be more accurately described as the “Magnificent 5.”
Growth equals growth—not valuation, not narrative, not hype.