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ETF Specialist

This Dynamic Small-Cap ETF Should Find an Edge

Bronze-rated Schwab Fundamental U.S. Small Company ETF attempts to profit from mean-reversion in valuations among small-cap stocks.

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 Schwab Fundamental U.S. Small Company ETF (FNDA) breaks the link between market prices and portfolio weightings, which injects a disciplined rebalancing approach that should give the fund an edge over its peers over the long term. This is a value strategy, though it falls in the small-blend Morningstar Category. The fund recently cut its fee to 0.25% from 0.32%, which is reasonable. But its inconsistent exposure to value stocks and risk of overweighting stocks with deteriorating fundamentals limit its Morningstar Analyst Rating to Bronze.

This fund offers broad exposure to small-cap U.S. stocks but weights them on fundamental measures of size, including sales (adjusted for leverage), retained operating cash flow, and dividends plus share buybacks, rather than market cap. This causes the fund to tilt toward stocks trading at low multiples of these metrics and away from stocks trading at higher valuations. However, it does not exclude growth stocks.

Alex Bryan has a position in the following securities mentioned above: VBR. Find out about Morningstar’s editorial policies.