FNDX Is a Popular Dividend ETF for Passive Income. But Is It the Best?

The Schwab Fundamental U

Large ETF is first and foremost a value investment, but even income investors need non-income performance

There are some great dividend-generating exchange-traded funds (ETFs) out there, but investors understandably want the best

Even the smallest of advantages can make a big difference to their portfolio's bottom line as the years add up

Of course, whatever ETF is chosen must also meet their bigger-picture non-income goals

So, how does the Schwab Fundamental U

While it's not the market's most-owned dividend ETF, it has attracted a respectably sized crowd for all the right reasons

Indeed, for a certain set of income-minded investors, this fund may well be your very best choice

The Schwab Fundamental U

Large ETF is worth a closer look It's not the go-to name in the category

Schwab's Fundamental U

Image source: Getty Images

Size isn't necessarily a sign of superiority, though

The Schwab Fundamental U

Large ETF is just distinctly different from either of those other two ETFs, meant for a different group of investors

Namely, FNDX isn't as much of a dividend fund as it is a performance-oriented value fund that also makes regular -- and rising -- dividend payments

The ETF mirrors the RAFI Fundamental High Liquidity U

Large Index, which is not on most investors' radars

But it's an interesting premise all the same

Large Index weights the size of its holdings based on fundamental criteria equity vs

Assets, operating cash flow, and dividends combined with stock buybacks

The more fundamentally compelling the stock is, the more of it the index owns

And this portfolio is rebalanced on a quarterly rather than an annual basis

This quick cadence of portfolio rebalancing isn't a drawback (due to greater taxability)

It's not even just an attribute

This strategy of regularly -- and actively -- swapping out overvalued value names with more undervalued ones "eliminates the performance drag associated with traditional passive investment vehicles," according to the fund

This apach "has historically led to outperformance in developed of apximately 1. 5%–2% a year. " And FNDX's long-term net gains confirm that the strategy is indeed working for this ETF

Large-Cap Value Total Stock Market Index

In other words, this slightly more active and automated replacement strategy seems to work at least a little better than a pure buy-and-hold minimalist regimen

Obviously, net gains are great, particularly if they're achieved at a modest degree of risk

That's not the chief goal here, however

Income investors' first priority is dividends

Where does the Schwab Fundamental U

Large ETF land on that front

It's a healthy option for some

It's not as immediately compelling as the aforementioned Schwab U

In fact, its quarterly per- payout has more than doubled over the course of the past 10 years

Data source: Schwab Asset Management

So, while it offers a smaller starting yield, this ETF's dividend payment grows just as quickly as those of more dividend-minded exchange-traded funds

So, is this ETF the best or not

Just understand the sacrifice you'll ly be making

That's weaker net gains due to weaker capital appreciation

On the other hand, if you're looking for an equal combination of dividends, dividend growth, and a simple way of adding value holdings to your portfolio at a time when growth stocks may be losing some of their luster, the Schwab Fundamental U

Large ETF makes good sense despite its more modest yield

That's certainly something to consider if this position is going to be owned outside of an IRA

Even then, however, don't undermine your long-term net performance by postponing or avoiding taxes just for the sake of postponing or avoiding taxes

You'll owe taxes one way or another

Remember as well that while FNDX can create an annual tax bill, you're also effectively raising the cost basis on your holding every year

This can also make it more palatable to sell the position in the future, should you decide to do so

James Brumley has no position in any of the stocks mentioned

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