A Better Mousetrap?

Charles Schwab launched three new index funds April 2 that are based on fundamental indexes rather than cap-weighted indexes such as the S&P 500. Fundamentally weighted indexes base inclusion in the index on a company’s sales, cash flow, dividends, and book value, rather than on market cap, P/E, or valuation, according to the creator of these indexes, Robert Arnott, chairman of Research Affiliates, LLC, based in Pasadena, California.

The funds are based on three FTSE RAFI indexes. The new funds are: Schwab Fundamental U.S. Large Company Index Fund (SFLNX), based on the 1000 largest U.S. companies based on fundamental measures; Schwab Fundamental U.S. Small-Mid Company Index Fund (SFSNX), based on 1500 small- and mid-cap companies; and Schwab Fundamental International Large Company Index Fund, based on 1000 large companies in developed markets (ex-U.S.).

On a conference call announcing the launch, Charles Schwab, chairman and CEO of the eponymous San Francisco-based firm, who started his own cap-weighted index fund, the Schwab 1000, in 1991, said: “What we’re talking about today is really an innovation, a new mousetrap, essentially, that is simply better than our old version of indexing.” He adds that fundamental indexing is, “a much better way to go about indexing than I’ve ever seen before,” and expects that the early users of the fundamental index funds will be independent investment advisors, but that individual investors will also become interested in them as they become more well known.