NEW YORK ( TheStreet) -- Although most investors are familiar with the popular market cap-weighted ETFs, Tony Davidow, vice president of Schwab Center for Financial Research, tells TheStreet's Gregg Greenberg that demand for fundamental ETFs is increasing.
In the popular market cap-weighted funds, the largest companies have the largest weighting, but Davidow says bigger isn't always better.
Fundamentally weighted ETFs are different, he said. The allocation goes toward companies with robust sales, solid cash flow, or strong dividends and stock-buyback programs.
Demand first arose from institutional investors. Davidow said they wanted exposure to specific sectors or industries, and not just the biggest companies, but the most efficient as well.Then the individual investor got involved, which is a good thing, he said. Using fundamental funds, individual investors can diversify their portfolios among growth stocks, value stocks and stocks with strong dividends. Although Charles Schwab (SCHW - Get Report) recently introduced six new ETFs, Davidow said he doesn't expect market cap-weighted ETFs like the SPDR S&P 500 Trust ETF (SPY) to go away. Instead, he said that fundamental ETFs are a nice complement to the market cap-weighted ETFs. -- Written by Bret Kenwell in Petoskey, Mich. Follow @BretKenwell