Domestic equity indexes have been grinding sideways all week as mixed economic reports and looming uncertainty over the Fed’s next move have weighed on euphoria levels. The bulls and bears have been at odds all week as lackluster economic growth in Japan has collided with the first positive quarter in the eurozone, making for a mixed international landscape amid a data-heavy week on the home front [see Visual Guide: Major Index Returns By Year].
Amid the tug of war on Wall Street, industry giant Charles Schwab is expanding its core equity lineup with “fundamental” products that go beyond traditional market capitalization-weighted ETFs.
Schwab Expands Beyond Market Cap-Weighted Indexes
Today, the company rolled out six new equity ETFs based on fundamentally-weighted indexes from benchmark provider Russell. The firm’s decision to launch new ETFs based around a more compelling weighting-methodology, in lieu of going after the “cheapest” offerings as it previously has, showcases the market’s growing demand for “smarter” index-based products [see also Want A Simple, 3-ETF Portfolio? Here Are 25 Of Them].
The new Schwab ETFs are based on Rob Arnott’s RAFI methodology, focusing on adjusted sales, operating cash flows, and dividends plus buybacks. Below are the new funds along with their respective expense ratios [see also The Truth About Alternative Weighting Methodologies]:
- Fundamental U.S. Broad Market Index ETF (FNDB) costs 0.32%
- Fundamental U.S. Large Company Index ETF (FNDX) costs 0.32%
- Fundamental U.S. Small Company Index ETF (FNDA) costs 0.32%
- Fundamental International Large Company Index ETF (FNDF) costs 0.32%
- Fundamental International Small Company Index ETF (FNDC) costs 0.46%
- Fundamental Emerging Markets Large Company Index ETF (FNDE) costs 0.46%
Meet The Competition
The new Schwab ETFs will face some stiff competition from more established PowerShares ETFs, which are also based around Arnott’s RAFI methodology; however, unlike the Schwab ETFs, the PowerShares ETFs focus more on book value, cash flow, sales, and dividends. These more established funds include:
- FTSE RAFI US 1000 Portfolio (PRF, A-) with over $2.2 billion in assets under management
- FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ, A-) with over $707 million in AUM
- FTSE RAFI Developed Markets Ex-US Portfolio (PXF, A-) with over $580 million in AUM
Schwab’s new fundamentally weighted ETFs warrant a closer look from anyone trying to steer clear of traditional cap-weighted products, which are prone to pesky nuances, namely over-weighting popular companies and overlooking undervalued ones.
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Disclosure: No positions at time of writing.