A new stock tracking index is making the rounds, the Required Business Performance Index as part of the Dow Jones RBP Index Series supplied by Transparent Value LLC. It is based on the simple notion of estimating the bar that a company has to cross in order to meet its earnings estimates. While the idea of such estimation is a good one, coming up with a methodology that can rigorously test this and predict this is not. The required business performance index tends to overweight companies that have a high probability of meeting expectations and underweight those with a lower probability of doing the same.

The index is still young, but backtests have shown it to have a better performance than the traditional Dow Jones Industrial Index. The methodology used for prediction tends to use business predictors (such as number of new store openings required, revenue yield percentage required on airlines and so forth) to help with its overall estimation of how far along a business was in achieving its stated targets. A business that was farther along its execution of business plan would tend to be overweighted in this index than one that had a higher bar to cross.

The Required Business Performance Index is issued by the Dow Jones Index and thus carries the integrity and rigor associated with other Dow Jones indices, and one could expect ETFs to emerge soon to mimic the performance of this index. Currently, this predictive strategy index is a US large cap stock index only - and thus once an ETF is created, it should occupy only that part of your asset allocation that is devoted to large cap stocks.

Typically, you should wait out one bull and one bear market cycle in US large cap stocks before latching onto this index so that you can test the methodology in thick or thin. If you must buy the ETFs earlier (once they come out), invest a small portion of your money and check their overall return versus returns from the Dow Jones Industrial Average. If the indicated methodology is solid, it should always pick companies that are executing better and have a better chance of hitting their stated numbers.

Happy Investing!