This ETF has the Fundamentals Down

Charles Schwab’s (NYSE: SCHW) lineup of exchange traded funds is best known as a group of ultra-low cost, easy-to-understand equity and fixed income funds that can be used as core portfolio holdings.

However, California-based Schwab offers more than just prosaic ETFs. Last year, Schwab joined an expanding number of ETF providers to enter the innovative and fast-growing market for fundamentally weighted ETFs that blur the line between active and passive management. One of the firm’s marquee fundamentally-weighted ETFs is the Schwab Fundamental U.S. Large Company Index ETF (NYSEArca: FNDX).

Although most fundamentally-weighted ETFs feature a value bias, FNDX’s lineup, though focused on large-caps, is not limited to holding only those stocks that appear inexpensive. FNDX “provides exposure to large U.S. companies using fundamental index methodology, developed by Rob Arnott and his firm, Research Affiliates, LLC. The Russell Fundamental Index Series utilizes three fundamental measures of company size: retained operating cash flow, adjusted sales, and dividends plus buybacks. It seeks investment results that track the performance, before fees and expense, of the Russell Fundamental U.S. Large Company Index,” according to Schwab.

The Research Affiliates indexing methodology serves as the cornerstone for some of the oldest, largest and, most importantly, successful smart beta ETFs on the market today. [Going Contrarian With Smart Beta ETFs]

Although FNDX is not an overt value ETF, it is heavy on sectors that currently trade at discounts to the S&P 500. For example, energy, financial services and consumer discretionary combine for over 39% of the ETF’s weight.

FNDX’s large weights to financials and consumer discretionary names along with technology being the ETF’s largest sector weight at almost 14% is the result of share buybacks factoring into the ETF’s weighting methodology. Led by tech, those companies in those three sectors have been among the largest buyers of their own shares this year.