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Strategy

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

Big picture: A three-dimensional view of diversification

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.

illustration of exposure principles as a cube

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.

icon of 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
Bar chart comparing exposure to magnificant seven stocks between SP500 and fundamental index

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 RAFI Fundamental High Liquidity US Large Index1 (the index benchmark of the Schwab Fundamental U.S. Large Company ETF and the Schwab Fundamental U.S. Large Company Index Fund) has reduced exposure to the Magnificent Seven Stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) compared with the S&P 500® Index.

Chart source: FactSet, as of September 30, 2025. 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.

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, 2025. For source information, see the MSCI FaCS disclosures at the bottom of this page.

MSCI Factor Box RAFI Fundamental High Liquidity US Large Index vs. S&P 500 Index

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.

Featured products

FNDE

Schwab Fundamental Emerging Markets Equity ETF

FNDF

Schwab Fundamental International Equity ETF

FNDX

Schwab Fundamental U.S. Large Company ETF

Access our complete lineup of Fundamental Index products

1 The RAFI Fundamental High Liquidity Index is a non-price-weighted index strategy that aims to deliver excess returns versus the cap-weighted benchmark. The strategy uses fundamental measures of company size to select and weight companies and to systematically rebalance against the market’s constantly shifting expectations. Source: Research Affiliates

MSCI FaCS provides absolute factor exposures to a broad global index - MSCI ACWI IMI.

Neutral factor exposure (FaCS = 0) represents MSCI ACWI IMI.

Based on MSCI FaCS data as of September 30, 2025. The MSCI FaCS information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI FaCS information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI FaCS information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI Inc., its affiliates and each person or entity involved in or related to compiling, computing or creating any MSCI FaCS information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, noninfringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. www.msci.com.

For additional information about the terms shown, please visit http://www.schwabassetmanagement.com/resources/glossary

The trade names "Research Affiliates®" and "Fundamental Index®" are registered trademarks of Research Affiliates, LLC.

Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can view and download a prospectus by visiting www.schwabassetmanagement.com/prospectus. Please read it carefully before investing.

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

There can be no assurance that the Fundamental Index® methodologies will achieve their desired outcomes. Each investing strategy brings with it its own set of unique risks and benefits.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Each RAFI Fundamental High Liquidity Index (each an Index) is a service mark of RAFI Indices, LLC or its affiliates (collectively, RAFI) and has been licensed for use by Charles Schwab Investment Management, Inc. The intellectual and other property rights to each Index are owned by or licensed to RAFI. The Schwab Fundamental Index Funds are not sponsored, endorsed, sold or promoted by RAFI, its agents or service providers (collectively, the RAFI Parties). The RAFI Parties: (i) make no representation or warranty as to the results to be obtained from the use of an Index or otherwise; and (ii) shall not be liable (whether in negligence or otherwise) to any person for any error in an Index. For full disclaimer, please see the funds’ statements of additional information.

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Investment and Insurance Products Are: Not FDIC Insured • Not Insured by Any Federal Government Agency • Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any of Its Affiliates • Subject to Investment Risks, Including Possible Loss of Principal Amount Invested

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