Top Ranked Foreign Large Cap ETF in Focus: FNDF
Though the U.S. markets had a spectacular run last year, things might not turn out to be so well this year. A series of downbeat economic data reports, including a sluggish housing market, a weaker retail and industrial sector coupled with other geo-political tensions have kept the markets downbeat since the start of the year.
To add to the woes, the International Monetary Fund (:IMF) and the World Bank have recently cut their respective growth forecast for the world’s largest economy. IMF now expects the U.S. economy to expand at a rate of 2% this year, down from its earlier estimate of 2.8%.
Also, with more than five years of the bull run (fueled by Fed’s easy monetary policies) drawing to a close, the U.S. markets currently appear somewhat expensive as compared to other foreign markets (read: 5 Best Performing ETFs of the 5 Year Bull Run).
The gradual end of the cheap dollar, overvaluation concerns and the sluggish data have shaken investor confidence in the U.S. equity markets. Investors are now exploring other foreign but developed markets.
In fact, a lot of firms have recently entered into deals with foreign players and have shifted their base outside the U.S to take advantage of low corporate taxes. This is especially true given the fact that the business tax rate in the U.S. is considered to be among the highest in the world.
Given these factors, it makes sense for investors to tap the foreign markets. Also, foreign stocks are expected to provide diversification benefits to a portfolio. However, a focus on large cap and mature companies would be a better idea to do so, given the prevailing geo-political tensions (read: 2 Top Ranked Large Cap Growth ETFs in Focus).
While investing in individual stocks could be an option, a more convenient way to invest in foreign large cap stocks is to invest in basket form. Thus a look at the top ranked foreign large cap ETF could be a good way to target the best of this segment.
One way to find a top ranked ETF in the large-cap space is by using the Zacks ETF Ranking system.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the large-cap space, we have taken a closer look at the top ranked Schwab Fundamental International Large Company Index ETF (FNDF). This ETF has a Zacks ETF Rank of 2 or ‘Buy’ and is detailed below (see: all the Top Ranked ETFs).
FNDF in Focus
Launched in August 2013, the fund seeks to track the performance of the Russell Fundamental Developed ex-U.S. Large Company Index.
The fund uses a fundamental index methodology focusing on three measures of company size – retained operating cash flow, adjusted sales, and dividends plus buybacks – to provide exposure to international large cap companies.
This focus results in the fund holding a basket of 780 stocks, with some of the well-known international players such as BP plc, Total SA, Royal Dutch Shell, Banco Santander and HSBC Holdings numbering among its top holdings.
Sector-wise, Financials occupies the biggest chunk of the portfolio, followed by Energy, Industrials, and Consumer Discretionary. Besides these, all other sectors have single-digit exposure in the fund, with Information Technology having the lowest allocation in the ETF.
If we look into the country-wise allocation of FNDF, U.K. occupies the top spot, followed by Japan and France. Stocks from these three countries take up about half of the fund assets, with securities from Spain, Italy and the Netherlands having the least exposure in the fund (read: Who Wins the 2014 World Cup of ETFs?).
In terms of style, the fund primarily focuses on value investing, with the rest being equally occupied by growth stocks and stocks having both a value and a growth touch.
However, the fund seems to be less popular and less liquid in the foreign large cap equities space, with a little over $100 million in assets and average daily volume of around 30,000 shares a day.
This has however not hampered its performance. The fund has outperformed the two most popular funds in this space -- iShares MSCI EAFE ETF (EFA) and Vanguard FTSE Developed Markets ETF (VEA). FNDF has returned roughly 6% as against 3.9% each by its largest competitors.
Thus, given the current momentum and FNDF’s favorable Zacks ETF Rank, the product is expected to outperform the broader markets. Investors can consider adding this fund to their portfolio, and especially if they are a bit light on international stocks.
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