Developed market equities continue lagging their U.S. counterparts in 2019, but in the world of exchange traded funds, there are some interesting, non-cap weighted ideas for investors. That group includes the Schwab Fundamental International Large Company Index ETF FNDF.
The $4.4 billion FNDF, which debuted in August 2013, tracks the FTSE Russell RAFI Developed ex US Large Company Index. That benchmark “measures the performance of the large company size segment by fundamental overall company scores, which are created using as the universe the developed ex U.S. companies in the FTSE Global Total Cap Index,” according to Schwab.
Home to 956 stocks, slightly more than the 927 found in the MSCI EAFE Index, FNDF uses a variety of inputs to construct its roster, but the fund has a value tilt.
Why It's Important
FNDF is a solid idea for investors looking for ex-U.S. developed market equities with quality traits because cash flows and and dividends plus buybacks are among the factors used in building the fund's roster.
“This approach has some advantages,” said Morningstar in a recent note. “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.”
Japan and the U.K. combine for about 40% of FNDF's geographic exposure while Eurozone equities represent 28%. Its top 10 holdings combine for just 12% of the roster, confirming that FNDF is diversified and features little stock-specific risk. FNDF's mix of value and growth stocks is potentially rewarding for investors.
“While the fund includes growth stocks, they do not detract from the fund’s value orientation because it owns less of them than a style-neutral benchmark like the FTSE Developed Ex-U.S. Index,” notes Morningstar. “This benefits investors because it helps diversify stock-specific risk. The fund doesn’t constrain country or sector weightings, so it can see some country or sector biases relative to the FTSE Developed Ex-U.S. Index.”
FNDF's annual fee of 0.25%, or $25 on a $10,000 investment, is favorable among international smart beta strategies, but to date, the fund has had difficulty cobbling together long-term out-performance of rival cap-weighted funds.
“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,” said Morningstar.
The research firm has a Bronze rating on FNDF.
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