Fundamental ETFs

This is one of a series of articles discussing smart beta ETFs. Other smart beta articles you can read:

A fundamental ETF is a so-called smart beta ETF that follows an index that selects stocks to buy using some fundamental measure about a company, such as the company's total revenue, or total stockholders equity, or debt to equity ratio. In the investing world, the term "fundamental" generally refers to information about a company that you can obtain from the company's financial statements. Some fundamental indexes also weight the stocks they are holding not on each stock's market capitalization but instead using each stock's total sales revenue, or some other fundamental measure of a company's size.

The idea is to select "good companies" based on each company's financial statements. Proponents of fundamental indexes believe that traditional stock market indexes that select and weight stocks using each company's market capitalization end up holding too many stocks that are "overvalued" or "overhyped".

We end up classifying most fundamental ETFs as "multi-factor" ETFs, because many fundamental ETFs select stocks using some measure of the company's earnings, which is the quality factor, or they select stocks with dividends.

The number of fundamentally weighted ETPs in our database:

Global Equity13
US Equity 27

Fundamental ETFs by inception date:

Year of InceptionCount

More and more ETFs are being launched that combine fundamental factors with other investment factors:

Number of Factors UsedCount

The fundamental ETFs use different approaches, so let's run through a few examples of what they are doing.

FNDB, the Schwab Fundamental U.S. Broad Market Index ETF, tracks the Russell RAFI U.S. index, which selects and weights stocks using the average of three fundamental measures of company size: retained operating cash flow, adjusted sales, and dividends plus buybacks. FNDB is very much a "multi-factor" ETF, because by selecting stocks based on retained operating cash flow and dividends it is using the "quality" factor, while also selecting stocks based on dividends plus stock buybacks. FNDB also is using an alternate weighting scheme.

RWL, the Revenue Shares Large Cap Fund ETF, tracks the S&P 500 but weights the stocks using each company's top line revenue rather than market capitalization. It is not immediately clear what the effect of the alternate weighting scheme really is, but data provided by RWL's website as of 12/31/2016 shows a definite tilt towards value:

Price/Earnings Ratio17.70 20.16
Price/Sales Ratio 0.811.98
Price/Book Ratio 2.592.90
Price/Cash Flow Ratio10.1113.02

FNDB and RWL are good examples of the challenge investors face when looking at smart beta ETFs:

One thing to always worry about with these smart beta ETFs is the unintended factor tilts that occur. RWL weights the S&P 500 using top line revenue. Is that really a good thing? The data provided by RWL's website clearly shows a value tilt, but it is hard to know what other factor tilts occur by doing this. Quality is one of the most well documented factors -- all things being equal, the stocks of highly profitable companies tend to outperform over long periods of time. Does ranking the S&P 500 by top line revenue unintentionally reduce your exposure to the "quality" factor? It is hard to know.

Similarly, what happens to RWL's exposure to the "size" factor? By looking at the Factsheets from RWL and SPY as of 12/31/2016, you can determine that RWL is skewing towards smaller size companies within the S&P 500: RWL's average market capitalization at 12/31/2016 was $117.01 billion, compared to $151,958.00 billion for SPY. That's probably a good thing, as RSP, which equal weights the S&P 500, has outperformed SPY over a long time period, mostly because the equal weighting tilts its holdings towards smaller sized companies in the S&P 500.

Both FNDB and RWL have decent track records so far, so we don't want to sound like we are being too critical. We are just trying to illustrate the difficulties associated with analyzing smart beta ETFs. Especially since every one seems to use a slightly different approach.

Here are the fundamental ETFs that use fundamental factors as an investment factor, if you want to read some examples of the approaches taken by fundamental ETFs:

SymbolDescriptionInception DateCategoryActions
SPHQInvesco S&P 500 Quality Portfolio ETF12/06/2005US Equity Analyze
PRFFTSE RAFI US 1000 Portfolio ETF12/19/2005US Equity Analyze
FTCSFirst Trust Capital Strength ETF07/06/2006US Equity Analyze
PRFZInvesco FTSE RAFI US 1500 Small-Mid Portfolio ETF09/20/2006US EquityAnalyze
IDHQInvesco S&P International Developed Quality ETF06/13/2007Global Equity Analyze
PXFInvesco FTSE RAFI Developed Markets ex-U.S. Portfolio ETF06/25/2007Global Equity Analyze
PDNInvesco FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio ETF09/27/2007Global Equity Analyze
PXHInvesco FTSE RAFI Emerging Markets Portfolio ETF09/27/2007Global Equity Analyze
RWLOppenheimer Large Cap Revenue ETF02/22/2008US Equity Analyze
HDViShares Core High Dividend ETF03/29/2011US EquityAnalyze
SCHDSchwab U.S. Dividend Equity ETF10/20/2011US EquityAnalyze
QUALiShares MSCI USA Quality Factor ETF07/16/2013US Equity Analyze
FNDASchwab Fundamental U.S. Small Company Index ETF08/15/2013US Equity Analyze
FNDBSchwab Fundamental U.S. Broad Market Index ETF08/15/2013US EquityAnalyze
FNDCSchwab Fundamental International Small Cap Company Index ETF08/15/2013Global Equity Analyze
FNDESchwab Fundamental Emerging Markets Large Company ETF08/15/2013Global Equity Analyze
FNDFSchwab Fundamental International Large Company Index ETF08/15/2013Global Equity Analyze
FNDXSchwab Fundamental U.S. Large Company Index ETF08/15/2013US Equity Analyze
RDVYFirst Trust Rising Dividend Achievers ETF01/06/2014US Equity Analyze
IVALValueShares International Quantitative Value ETF12/16/2014Global EquityAnalyze
IQLTiShares MSCI Intl Dev Quality Factor ETF01/13/2015Global EquityAnalyze
PYPrincipal Shareholder Yield Index ETF03/21/2016US Equity Analyze
EYLDCambria Emerging Shareholder Yield ETF07/13/2016Global EquityAnalyze
XSHQInvesco S&P SmallCap Quality Portfolio ETF04/07/2017US EquityAnalyze
VSDAVictoryShares Dividend Accelerator ETF04/17/2017US Equity Analyze
CSMLIQ Chaikin U.S. Small Cap ETF05/20/2017US Equity Analyze
SDVYFirst Trust SMID Cap Rising Dividend Achievers ETF11/02/2017US EquityAnalyze
JQUAJPMorgan U.S. Quality Factor ETF11/09/2017US Equity Analyze
ISEMInvesco Strategic Emerging Markets ETF09/12/2018Global EquityAnalyze
IUSInvesco Strategic US ETF09/12/2018US Equity Analyze
IUSSInvesco Strategic US Small Company ETF09/12/2018US Equity Analyze
DSTLDistillate U.S. Fundamental Stability & Value ETF10/24/2018US Equity Analyze
IQINIQ 500 International ETF12/13/2018Global EquityAnalyze
VRAIVirtus Real Asset Income ETF02/08/2019US EquityAnalyze
FOVLiShares Focused Value Factor ETF03/21/2019US Equity Analyze
RAFEPIMCO RAFI ESG U.S. ETF12/19/2019US EquityAnalyze
DEEPRoundhill Acquirers Deep Value ETF06/22/2020US Equity Analyze
KVLEKFA Value Line Dynamic Core Equity Index ETF11/24/2020US Equity Analyze
DFNVTrimTabs Donoghue Forlines Risk Managed Innovation ETF12/08/2020US Equity Analyze
SCHYSchwab International Dividend Equity ETF04/29/2021Global Equity Analyze

All data is a live query from our database. The wording was last updated: 02/23/2018.

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