Last year, Charles Schwab (NYSE: SCHW) joined the list exchange traded fund providers to enter the innovative and fast-growing market for fundamentally weighted ETFs that blur the line between active and passive management.
California-based Schwab introduce six fundamental index ETFs in August, one of which was the Schwab Fundamental U.S. Large Company Index ETF (NYSEArca: FNDX). [Schwab Launches Fundamentally Weighted ETFs]
FNDX has been a success, returning over 13% and gaining $102 million in assets since its launch. The fund has also garnered praise from analysts.
“Most fundamental index funds exhibit a value tilt. However, in contrast to traditional value index funds, this fund does not restrict its holdings to the cheaper side of the market, which may improve diversification,” said Morningstar analyst Alex Bryan in a recent note.
Bryan notes that FNDX pares its exposure to stocks when valuations expand relative to their peer group and adds positions in stocks where valuations have compressed.
FNDX holds 605 stocks across all 10 GICS sectors with the top allocation being a 16.1% weight to the energy sector. Throw in a 4.5% weight to utilities and better than one in five FNDX holdings reside in one of this year’s two best-performing sectors. [Sector ETF Ideas for May]
Other double-digit sector weights include 13.1% to technology, 12.7% to financial services and 11.4% to consumer discretionary and staples. Nine of FNDX’s top-10 holdings are Dow components with former Dow member Hewlett-Packard (NYSE: HPQ) the outlier.
FNDX is overweight technology stocks relative to the Russell 1000 because share buybacks factor in the ETF’s weighting methodology and the tech sector is home to some the largest share repurchasers. FNDX tracks the Russell Fundamental U.S. Large Company Index.
“Over the long run, betting on value has paid off in nearly every market studied. Investors may extrapolate recent growth too far into the future, which can push prices away from fair value. This fund counters that bias by anchoring its weights in each company’s proven capacity to create value. This approach has worked we ll so far. Over the trailing five years through March 2014, the fund outpaced the Russell 1000 Index by 3.9% annualized, while the large-blend category average lagged that benchmark,” according to Morningstar.
FNDX charges 0.32% per year, which is low among fundamentally weighted ETFs. Additionally, portfolio turnover of just 6% helps keep costs low and Schwab clients gain even more savings because FNDX, like all Schwab ETFs, are available on a commission-free basis. [Schwab Adds ETFs to Commission-Free Lineup]
Schwab Fundamental U.S. Large Company Index ETF
ETF Trends editorial team contributed to this article.