To appreciate why the fundamental funds shined in recent years, consider how the S&P 500 and Schwab U.S. Large Company Fund differed during the downturn. As the credit crisis unfolded, financial stocks collapsed. In the S&P 500, the financial weighting dropped from 17% of assets in 2007 to 10% in the spring of 2009. But revenues of financial companies such as JPMorgan (JPM) and Bank of America (BAC) were still enormous. As a result, the weighting of financial stocks in the Schwab fundamental fund held steady at about 20%.
In 2008, the decreasing financial holdings helped to protect the S&P, which lost 37% for the year, and outpaced the Schwab fund by 3 percentage points. But when financials roared back in 2009, Schwab shifted into the lead, gaining 42% for the year, and outdoing the S&P by 16 percentage points.
For this year, Schwab has returned 10.6% and outpaced the S&P by 3 percentage points as the recovery of financial stocks continues. "Fundamental funds tend to do best when markets are volatile and share prices move away from the fundamental values," says Jason Hsu, chief investment officer of Research Affiliates.
Part of the appeal of many fundamental funds is that they have a bias for value stocks, which tend to outperform the market over the long term. Consider RevenueShares Large Cap, which weights stocks solely on revenues. Holdings in the fund's top 10 include Ford Motor (F) and Citigroup (C), companies with big revenues and relatively modest market capitalizations.In its top 10, the fundamental fund has no computer or software stocks. In contrast, the top 10 holdings of the S&P 500 include technology blue chips, such as Apple (AAPL), which has a big market capitalization and relatively small revenues. "The weightings of the top 10 holdings in the S&P 500 are based on the speculation and hope of investors," says Sean O'Hara, president of RevenueShares. "We base our weightings on the reality of revenues."
A Better MousetrapIn recent years, these fundamental index funds have outdone the traditional benchmarks.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV