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Despite a relatively late start in the exchange traded funds industry, Charles Schwab is now the fifth-largest issuer in the space. As of Sept. 4, Schwab ETFs had a combined $376.15 billion in assets under management.
That was good for a lead of nearly $209 billion over the sixth place issue, but about $192 billion its rival in fourth place. Still, more than $376 billion in AUM in the hyper-competitive U.S. ETF industry is nothing to scoff at and how Schwab arrived at that lofty status isn’t surprising. It was a combination of enviable brand recognition, superior distribution within the advisor community and low fees.
It also helps that of the 25+ ETFs in the Schwab lineup, the bulk of those products are straight-forward, pure beta, index-based products. Or in layman’s terms, most Schwab ETFs are easy to understand. That’s valuable for both advisors and retail investors.
However, the issuer also offers some fundamentally based, or smart beta, ETFs. That group includes the Schwab Fundamental U.S. Large Company ETF (FNDX). Let’s examine that fund below.
FNDX Could Be Fabulous
FNDX, which turned 11 years old last month, tracks the RAFI Fundamental High Liquidity U.S. Large Index and is considered a large-cap value fund. The underlying index places emphasis on a company’s size and weight with 738 stocks making the cut for admittance, giving FNDX a larger roster than some pure beta value ETFs. Then again, FNDX is far from a standard value ETF.
“This index strategy has a contrarian bent, weighting stocks by their fundamental size instead of market cap. At each rebalance, the fund effectively doubles down on declining stocks and trims exposure to those on the rise,” notes Morningstar analyst Ryan Jackson. “Going against the grain doesn’t always work, but it helps the fund thrive when overhyped companies sink and undervalued ones rise to the top.”
While the research firm classifies FNDX as a large-cap value fund, the ETF’s value purity may be questioned though that’s not an indictment. FNDX allocates more than a quarter of its weight to the technology and communication services sectors, which are growth staples. Likewise, not many value ETFs feature Alphabet (GOOG), Meta Platforms (META) and Amazon (AMZN) among their top 10 holdings, but FNDX does.
“The fund sweeps in the full large- and mid-cap US stock market, and fundamental weighting promotes solid balance. Firms like Apple AAPL, Microsoft MSFT, and Amazon AMZN still anchor this portfolio, just in smaller proportions than traditional cap-weighted benchmarks,” adds Jackson.
FNDX Is Diverse
At a time when some clients are worried about high levels of concentration in cap-weighted ETFs, FNDX could be an attractive option because its top 10 holdings combine for about 21% of the fund’s roster. Compare that with a basic S&P 500 ETF or index fund where the top four holdings exceed that percentage.
Speaking of breadth, FNDX’s depth could be an asset should the equity market rally spread its wings and fly to new corners beyond mega-cap growth.
“Pairing this broad scope and fundamental focus has yielded strong results. The fund gained 11.6% per year over the past decade, better than 95% of its peers in the large-value category,” concludes Jackson. “Though that trailed the Russell 1000′s 12.9% gain, the fund should measure up better if the market rally broadens out.”
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