A Smart Beta Approach to Developed Markets

With stocks in ex-US developed markets trailing their U.S. counterparts this year, investors looking for overseas value may want to consider exchange traded funds 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. The $4 billion fund celebrated its fifth birthday in August. FNDF targets the Russell RAFI– Developed ex US Large Company Index.

“When the fund rebalances, it increases its exposure to stocks that have become cheaper relative to these metrics and cuts back on its exposure to those that have become more expensive,” said Morningstar. “This contrarian approach introduces a value tilt to the portfolio, and its price/book ratio is in line with the MSCI World ex USA Value Index. The fund’s index calculates each stock’s fundamental size annually, but the fund rebalances a different fourth of its portfolio each quarter. Breaking up the rebalancing should be an improvement over a single annual rebalance because it helps reduce the risk of poorly timed rebalances and reduces the market-impact cost of trading.”

Related: The Time is Right to Call on Quality Factor