Strategy

Understand how a portfolio may benefit from the Fundamental Index® approach and how this strategy can be used in portfolio construction.

Magnifying glass over donut chart

Big picture: A three-dimensional view of diversification

illustration of exposure principles as a cube

By approaching exposure to the market, weights, and factors differently, Fundamental Index provides opportunities for portfolio diversification that go beyond market exposure, which can help investors be more strategic in reaching financial goals.

How can Fundamental Index help diversify portfolios?


Going beyond market exposure

Holding a variety of stocks is a common way to diversify a portfolio, but investors can be more strategic about reaching their goals by approaching diversification in other ways. Weighting and factor exposure are other elements to consider when constructing a well-rounded portfolio, and Fundamental Index can help account for these three dimensions at once.

DNA

How can Fundamental Index help diversify portfolios through weighting exposure?


Weighting exposure: Distribution

The market-capitalization approach tends to give greater weight to stocks that have the highest demand. The Fundamental Index approach, however, breaks the link between price and weight, allowing for exposure of companies and sectors based on their economic footprint.

Strategies illustrated like single celled organisms

Weighting exposure: Concentration

Market cap-weighted indexes are often fueled by the performance of their biggest stocks. However, Fundamental Indexes tend to have reduced exposure to those same stocks, providing differentiated performance. For example, the Russell RAFI™ US Large Company Index (the index benchmark of the Schwab Fundamental U.S. Large Company Index ETF and the Schwab Fundamental US Large Company Index Fund) has reduced exposure to the FANG stocks (Facebook, Amazon, Netflix, Google) compared with the S&P 500® Index.

Chart source: FactSet, as of September 30, 2023. All holdings shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

•Exposure to FANG stocks | Facebook, Amazon, Netflix, Google| 5.9% - Russell RAFI U.S. Large Company Index (Meta Platforms Inc. Class A, Amazon, Netflix, Inc., Alphabet Inc. Class A, Alphabet Inc. Class C) | 9.5% - S&P 500® Index (Meta Platforms Inc. Class A, Amazon, Netflix, Inc., Alphabet Inc. Class A, Alphabet Inc. Class C)

How can Fundamental Index help diversify portfolios through factor exposure?


Getting strategic with desired factors

Factors are the elements of an index fund that drive risk and return and include things like relative value and revenue potential. The Fundamental Index approach enables advisors to get more strategic about their factor exposure, as these indexes tend to tilt toward potentially desired factors or objectives. For example, Fundamental Index can offer an increased exposure to value and yield.

MSCI Factor Box data as of September 30, 2023.
For source information, see the MSCI FaCS disclosures at the bottom of this page.

MSCI Factor Box

Value

The Fundamental Index approach focuses on economic drivers of value, which can make it a good investment strategy for long-term investors.

Low size (smaller companies)

The Fundamental Index approach tends to overweight undervalued companies and underweight overvalued companies compared with market cap-weighted indexes, embedding a buy-low, sell-high strategy.

Yield

Because of the way the Fundamental Index approach is structured, these index strategies may have a dynamic value and dividend yield factor tilt when compared with market cap-weighted indexes.

Growth

Market cap-weighted indexes tend to have a growth bias, overweighting companies whose market value has recently appreciated. The Fundamental Index approach is less prone to this.