The Schwab Fundamental International Small Equity ETF (FNDC) presents an intriguing investment opportunity for those looking to diversify internationally and capitalize on undervalued assets. Despite a somewhat slower earnings growth projection and a slightly higher expense ratio, FNDC's unique value-centric strategy positions it for potential outperformance against the broader market, specifically the S&P 500. This makes it a compelling option for investors seeking exposure to international small-cap companies with a fundamental value bias. However, investors should be mindful of risks such as economic downturns and a potential strengthening of the U.S. dollar, which could impact its performance.
FNDC: A Deep Dive into International Small-Cap Value
The Schwab Fundamental International Small Equity ETF (FNDC) focuses its investments on a diversified portfolio of smaller companies located outside the United States, typically those with a market capitalization of approximately $5.6 billion. This ETF employs a unique indexing methodology that prioritizes fundamental value, screening companies based on key financial metrics such as adjusted sales, retained operating cash flow, and the combined value of dividends and share buybacks. This rigorous screening process inherently imparts a value bias to the ETF's holdings.
A significant characteristic of FNDC's portfolio is its attractive valuation; the held companies currently trade at a trailing price-to-earnings (P/E) ratio of just 15x. This relatively low P/E ratio is partly attributable to a strategic overweighting in cyclical sectors, which often exhibit lower valuations during certain market phases. The outperformance of FNDC against the Vanguard S&P 500 ETF (VOO) has been fueled by both these competitive valuations and the recent depreciation of the U.S. dollar.
However, potential investors should consider that FNDC faces certain headwinds. The outlook for earnings growth for its constituent companies is currently projected to be slower than some counterparts. Additionally, the ETF's expense ratio, while not exorbitant, is somewhat elevated compared to some passively managed funds. Despite these factors, the strong fundamental screening and the inherent value proposition suggest a favorable long-term outlook.
Critical risks that could impact FNDC's performance include periods of weak global economic growth, which could disproportionately affect small-cap companies, and a potential reversal in the recent trend of U.S. dollar weakness. A stronger dollar would make international investments less attractive for U.S.-based investors by diminishing returns when converted back to the home currency.
Reflections on Value Investing in a Globalized Market
This analysis of the Schwab Fundamental International Small Equity ETF offers a compelling perspective on the enduring relevance of value investing, especially when applied to international markets. In an era where growth stocks often dominate headlines, the disciplined approach of seeking fundamentally sound yet undervalued companies, as practiced by FNDC, highlights a strategy that can generate significant returns. It underscores the importance of looking beyond domestic borders for investment opportunities, recognizing that global economic shifts and currency fluctuations can play a pivotal role in portfolio performance. The success of FNDC serves as a reminder that patience and a deep understanding of underlying business fundamentals, coupled with a strategic geographical diversification, are key tenets of successful long-term investing, even amidst macroeconomic uncertainties.