I have to admit I really like the theory behind fundamental ETFs. The goal of a fundamental approach is to weight companies in the index based on their financial health, rather than by their size. Ideally, because of this focus on quality, it should provide a return that is comparable to a market cap weighted index, with less volatility. In this case, the top 1000 listed companies that trade outside the U.S. are ranked by four fundamental criteria; sales, cash flows, book value, and dividends. Unfortunately, the reality hasn’t quite lived up to the theory. While the longer term performance of this ETF has been comparable to the MSCI EAFE Index, it has also been more volatile, with a standard deviation that is above the index. Further, it has consistently underperformed the index in falling markets. The valuation metrics of this portfolio appear to be more favourable than the broader market. However, according to Morningstar, the forward looking growth numbers are also lower, which indicates it may not be quite as favourably valued as it appears on the surface. I like the theory of this, but am monitoring it further in the short term for a deepening divergence in returns or an uptick in overall volatility.20