Episode summary
Rob Arnott on Market Valuations, AI, and the RAFI Approach
ETF Prime
· · 55 min · Guests: Rob Arnott
Summary
Rob Arnott argued that recent geopolitical shocks, tariff fears, and the Iran conflict are best understood as catalysts for market inefficiencies rather than reasons to assume a lasting regime change. He said investors and the media tend to overreact to crisis headlines, while many of the inflation and oil-price effects are one-off step-ups rather than persistent trends. Against that backdrop, he remains cautious on U.S. equities because valuations are still historically expensive, even if American exceptionalism justifies some premium.
He said the strongest long-term opportunities are in non-U.S. equities, especially value and smaller-cap value, because those markets remain much cheaper and his 10-year return framework points to about 8% for non-U.S. stocks versus less than 4% for U.S. stocks. Arnott also said the AI revolution is real and highly productive, but AI stocks are already expensive and some of the hype resembles the dot-com era: disruptive technology can be transformative without justifying extreme valuations.
A large part of the conversation focused on Research Affiliates’ fundamental index approach and the new RAUS ETF. Arnott said the strategy changes the way stocks enter and leave the portfolio by using business fundamentals instead of market-cap momentum, aiming to avoid buying companies after they have already soared. He said the new ETF has roughly 99.9% correlation with the S&P 500, but still seeks a value tilt and better long-run risk-adjusted returns.
Key takeaways
- Arnold said geopolitical shocks such as the Iran conflict tend to create temporary mispricings, not durable investment truths.
- He expects non-U.S. stocks to outperform over a 10-year horizon, with roughly 8% expected returns versus less than 4% for U.S. stocks.
- Arnott said AI is a real productivity boost, but AI equities are becoming expensive and should be trimmed gradually, not dumped all at once.
- He described RAFI as a fundamental-indexing process that weights companies by business size, not market-cap momentum, to capture rebalancing alpha.
- He said the new RAUS ETF seeks 99.9% correlation with the S&P 500 while replacing cap-weighted stock selection with fundamental selection.
Notable quotes
“I view geopolitical shocks like Iran as catalysts that create market inefficiencies. That is to say, people react and they don't look past the crisis”
“you risk losing your job to somebody who knows how to use AI better than you do. So start studying and that's the essence of it”
How the episode opens
I view geopolitical shocks as catalysts that create market inefficiencies. That is to say, people react and they don't look past the crisis. All right, joining me will be Rob Arnot, founder and chairman of the board of research affiliates who back in September they launched their second ETF.
This is under Rafi indices which is the index company of research affiliates. So the ETF is the RAW US ETF, ticker Rouse, R A US, and in a nutshell, this essentially takes the companies in the S&P 500, but changes the way they're added or dropped from that index by looking at uh various fundamental factors. We'll get into all of the details of this, but Research Affiliates overall, of course, they are a global leader in indexing.
They currently power the indices behind 20 ETFs here in the US. About 86 billion dollars invested, including from major issuers such as Invesco, uh Charles Schwab, PIMCO. Overall, we are talking about some $180 billion in assets managed worldwide using investment strategies developed by research affiliates.
And so, Rob and I are going to discuss that indexing business. I also want to get Rob's thoughts on the current market environment. And again, we'll spotlight that recently launched ETF as well.
As always, questions or comments, you can find me on XNate Jerase or you can go to ETF prime.com. So, let me now welcome in the one and only Rob Arnot, founder and chairman of the board of research affiliates who is joining me from Miami. Rob, it is so great having you back on the podcast.
It's always a pleasure. Well, thank you for inviting me. This is always wonderful fun.
All right. So, there is a lot I want to get into, but I thought let's actually start with a current market environment because I think that will help set a nice backdrop for us to discuss the Rafi ETFs and the indexing business.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- market valuations
- ai impact on markets
- rafi methodology
- systematic indexing
- us etf
Companies and tickers mentioned
- Research Affiliates
- RAUS
Watch the episode
Watch “Rob Arnott on Market Valuations, AI, and the RAFI Approach” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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ETF Prime, this episode and its artwork belong to Nate Geraci. Octagon is not affiliated with the show; this page is an independent summary.
