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

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.S. Large ETF (NYSEMKT: FNDX) stack up among all the major income-generating exchange-traded funds? 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.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

The Schwab Fundamental U.S. Large ETF is worth a closer look

It's not the go-to name in the category. That honor belongs to the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) and the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), boasting $91 billion and $68 billion in investor assets, respectively. Schwab's Fundamental U.S. Large ETF is markedly smaller, with only $18 billion worth of assets under management.

Image source: Getty Images.

Size isn't necessarily a sign of superiority, though. The Schwab Fundamental U.S. 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.S. Large Index, which is not on most investors' radars. But it's an interesting premise all the same. Rather than a cap-weighted index like the S&P 500 that's allowed to ebb and flow unchecked until some of those tickers are replaced by more appropriate ones at some point in the future, the RAFI Fundamental High Liquidity U.S. Large Index weights the size of its holdings based on fundamental criteria like 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. It's a feature. This strategy of regularly -- and proactively -- swapping out overvalued value names with more undervalued ones "eliminates the performance drag associated with traditional passive investment vehicles," according to the fund. The end result? This approach "has historically led to outperformance in developed markets of approximately 1.5%–2% a year."

And FNDX's long-term net gains confirm that the strategy is indeed working for this ETF. For the past 10 years, it's outperformed the comparable Vanguard Value ETF (NYSEMKT: VTV) as well as the Schwab U.S. Large-Cap Value ETF (NYSEMKT: SCHV), the latter of which is built to reflect the performance of the Dow Jones U.S. Large-Cap Value Total Stock Market Index.

Data by YCharts.

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.

But the dividend?

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.S. Large ETF land on that front?

It's a healthy option for some.

It's not as immediately compelling as the aforementioned Schwab U.S. Dividend Equity ETF, which currently sports a yield of just under 4%. The ProShares S&P 500 Dividend Aristocrats ETF is presently paying more as well, with newcomers plugging in at a dividend yield of nearly 2.5%. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.) For perspective, FNDX's current trailing yield is a mere 1.8%.

That's a dividend yield, however, based on payments that have been reliably raised since that fund's inception back in 2013. In fact, its quarterly per-share payout has more than doubled over the course of the past 10 years.

Data source: Schwab Asset Management. Chart by author.

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. To this end, between the reinvestment of capital gains and dividends dished out in the meantime, on a net basis, FNDX has actually outperformed NOBL and SCHD since the middle of 2015 by virtue of its greater capital appreciation -- even if it hasn't led for the entirety of that 10-year stretch.

So, is this ETF the best or not? It depends

If you're looking for the highest-possible entry yield with an investment that will also reliably grow its dividends over time, your best option is still the ProShares S&P 500 Dividend Aristocrats ETF or the Schwab U.S. Dividend Equity ETF, both of which boast better yields than FNDX's current dividend yield of less than 2%. Just understand the sacrifice you'll likely 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.S. Large ETF makes good sense despite its more modest yield.

What about the portfolio's above-average turnover (of more than 10%) that leads to greater annual taxability? 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.

Should you invest $1,000 in Schwab Strategic Trust - Schwab Fundamental U.s. Large ETF right now?

Before you buy stock in Schwab Strategic Trust - Schwab Fundamental U.s. Large ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Schwab Strategic Trust - Schwab Fundamental U.s. Large ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $697,627!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $939,655!*

Now, it’s worth noting Stock Advisor’s total average return is 1,045% — a market-crushing outperformance compared to 178% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of June 30, 2025

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ProShares S&P 500 Dividend Aristocrats ETF, Vanguard Dividend Appreciation ETF, and Vanguard Index Funds-Vanguard Value ETF. The Motley Fool has a disclosure policy.