Pimco Is Taking New Index For A Spin; Weaned Off Market Cap; Fund holdings weighted by sales, other factors; rivals voice skepticism.(MUTUAL FUNDS)(INVESTMENT TRENDS)

Byline: KEN HOOVER

On the theory there's a better way to build an index fund, Pimco is launching two new funds that Pimco founder and Managing Director Bill Gross thinks can outperform traditional indexes over the long run.

Fundamental IndexPlus Fund and Fundamental IndexPlus TR opened for business Thursday and don't yet have ticker symbols.

Rob Arnott, editor of the Financial Analysts Journal and who runs Research Affiliates in Pasadena, Calif., conceived the index. He says the problem with traditional indexes is they are weighted by the market capitalization of each stock.

Market cap is the number of shares outstanding multiplied by the share price. In other words, it's a company's total market value.

Two of the biggest names in the S&P 500, General Electric and Exxon Mobil, each with market caps around $372 billion, count for many times more than one of the smallest names, troubled Delta Air Lines, which weighs in at only $581 million.

The flaw in using market cap as the basis for weighting stocks, argues Arnott, is that it overweights stocks investors have been buying. So overvalued stocks are overweight, and undervalued stocks are underweight, he says.