Schwab Fundamental International ETF Outperforms S&P 500

The Schwab Fundamental International Large Company Index ETF (FNDF) has seen significant gains, rising 21% year-to-date and 45% over the last twelve months [1]. This performance has notably outpaced the SPDR S&P 500 ETF Trust (SPY), which recorded an 8% gain year-to-date and a 23% increase over the same twelve-month period [1].

Key takeaways

• FNDF tracks the Russell RAFI Developed ex-US Large Company Index, which weights holdings by adjusted sales, cash flow, and dividends rather than market capitalization [1].
• The fund’s performance has doubled that of the iShares MSCI EAFE ETF, a common benchmark for developed international markets [1].
• A weaker U.S. dollar contributed approximately 7 percentage points to international equity returns over the past year [1].
• European fiscal policy, including German infrastructure spending and increased defense outlays, has provided a tailwind for regional economic growth [1].

The Mechanics of Fundamental Indexing

The outperformance of FNDF is largely attributed to its unique weighting methodology, known as fundamental indexing [1]. Unlike standard cap-weighted indices that favor the largest companies by market value, FNDF focuses on metrics such as retained operating cash flow, adjusted sales, and dividends plus buybacks [1]. This approach creates a structural tilt toward value-oriented sectors like industrials, financials, and energy, which have recently benefited from re-ratings in European and Japanese markets [1].

External macroeconomic factors have further amplified these returns. As the U.S. dollar weakened, the translation of foreign-denominated assets—such as euros, yen, and pounds—into a softer dollar added to the fund's gains [1]. Additionally, modest growth in the euro area, supported by German fiscal loosening and broader European defense spending, has helped lift valuations that had previously suffered from years of stagnation [1]. While FNDF has outperformed the S&P 500 over the last year, the cumulative long-term performance remains in favor of U.S. equities, with FNDF returning 214% over the last decade compared to 254% for SPY [1].

Why it matters

The future trajectory of this trade depends on three primary variables: the strength of the U.S. dollar, the actual disbursement of European fiscal spending, and the valuation spread between FNDF and standard international benchmarks [1]. If the U.S. dollar stabilizes or rallies, the currency-translation benefit that bolstered recent returns could diminish [1]. Furthermore, investors are watching for concrete evidence of European infrastructure and defense spending in official economic data, as the difference between announced budgets and actual disbursements remains a critical factor for market performance [1]. As the valuation gap between the fundamental index and cap-weighted indices closes, the structural advantage of FNDF may compress, causing the fund to perform more in line with broader international market averages [1].