A Cost-Effective, Fundamental Approach to International Equities

With stocks in ex-US developed markets trailing their U.S. counterparts this year, investors looking for overseas value may want to consider ETFs with alternative weighting methodologies. That group includes the Schwab Fundamental International Large Company ETF (NYSEArca: FNDF).

FNDF’s fundamental indexing methodology weights holdings by company-sized based on adjusted sales, operating cash flow, and dividends plus buyback. While FNDF features both growth and value stocks, it’s classified as a large-cap foreign value fund.

“Steering the portfolio away from the most expensive stocks can help performance if and when valuations mean-revert–but there is a trade-off. Ignoring prices means the fund can overweight stocks with declining fundamentals, which can add to its risk,” said Morningstar in a recent note.

Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations.

Focus on FNDF

The $4.4 billion FNDF, which debuted just over six years ago, charges 0.25% per year, or $25 on a $10,000 investment. That compares favorably to the broader universe of international equity smart beta ETFs. For the bulk of FNDF’s time on the market, the primary headwind it has faced is U.S. stocks outperforming developed market rivals.

“This strategy has shown some potential over short stretches, but it has not yet provided a long-term advantage over the FTSE Developed ex-U.S. Index. Its total and risk-adjusted returns were similar to this benchmark from its launch in August 2013 through May 2019,” according to Morningstar.

The fund holds 956 stocks with Japan and the U.K. combining for about 40% of its geographic weight. Eurozone equities represent over 28% of FNDF’s roster.

Related: Excellence in Emerging Markets Income 

“Despite its value orientation, the fund also includes growth stocks,” notes Morningstar. “This should improve its reach and allow the fund to take advantage of mean reversion in valuations wherever they occur in the large-cap market segment. Additionally, it diversifies stock-specific risk better than the market-cap-weighted MSCI World Ex USA Value Index.”

Morningstar has a Bronze rating on FNDF.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.