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ETF Specialist

A Dynamic Approach to Value Investing Abroad

This fundamentally weighted exchange-traded fund offers a good way to overweight value stocks in foreign developed markets.

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Investors who want to overweight value stocks in the United States have plenty of cheap options to do so. Unfortunately, investors have to pay up more for a value tilt in foreign developed markets. The only major market-cap-weighted value index fund in the foreign large-value Morningstar Category,  iShares MSCI EAFE Value (EFV), charges 0.40%, significantly more than Vanguard FTSE Developed Markets (VEA) (0.10%). Schwab Fundamental International Large Company (FNDF) is slightly cheaper (0.32% expense ratio). This exchange-traded fund introduces a value tilt with an unconventional approach.

Rather than weighting its holdings according to market capitalization, as most indexes do, Schwab Fundamental International Large Company weights its holdings based on fundamental measures of size. These include average sales (adjusted for leverage), retained operating cash flow, and dividends plus share buybacks over the past five years. This approach causes the fund to overweight cheaper stocks and underweight the more expensive ones relative to a market-cap-weighted index. For example, if two stocks generate the same dollar value of sales, but one trades at a higher valuation than the other, it would receive a greater weighting in a market-cap-weighted index. In contrast, a fundamental index fund would assign the same weighting to these stocks, holding other factors constant.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.