FNDC: A Tax-Efficient, Fundamental-Weighted Path to International Small-Cap Growth

The iShares MSCI Global Small Cap Value Weighted ETF (FNDC) has emerged as a compelling vehicle for investors seeking exposure to international small-cap equities through a disciplined, fundamental-weighted lens. As markets grapple with persistent volatility and shifting valuation dynamics, FNDC's alignment with contrarian value investing and smart beta principles positions it as a strategic alternative to traditional cap-weighted benchmarks. With a year-to-date return of 35.64% as of December 31, 2025, the fund's performance underscores its ability to capitalize on long-term mean reversion while mitigating tax drag-a critical consideration in an era where after-tax returns increasingly define portfolio success.

Contrarian Value Investing Reimagined

FNDC's investment methodology is rooted in the RAFI Fundamental High Liquidity Developed ex US Small Index, which diverges sharply from conventional market-cap weighting. Instead, the index assigns weights based on fundamental metrics such as delevered sales, cash flow, book value, and dividends plus buybacks. This approach inherently avoids overweights to overvalued stocks and underweights to undervalued ones, a hallmark of contrarian value investing. By prioritizing companies with strong fundamentals and liquidity, the strategy seeks to exploit mispricings in global small-cap markets, where inefficiencies are more pronounced than in large-cap counterparts.

The index's disciplined rebalancing mechanism further amplifies its contrarian edge. Securities whose prices have risen are systematically sold, while those that have fallen are bought, embedding a "buy low, sell high" philosophy into the fund's DNA. This dynamic not only aligns with the long-term mean reversion observed in value stocks but also mitigates the risk of holding overextended positions. For investors wary of the cyclical nature of small-cap equities, FNDC's structure offers a rules-based framework to navigate valuation extremes without relying on active stock-picking.

Smart Beta with Tax Efficiency

Smart beta strategies have long promised enhanced risk-adjusted returns through alternative weighting schemes, but their tax implications often remain overlooked. FNDC, however, excels in this regard. The fund's Tax Cost Ratio of 0.69% as of January 2, 2026, reflects exceptional tax efficiency, a rarity in the small-cap space. This metric, which measures the percentage of portfolio value lost to taxes annually, is significantly lower than the category average, thanks to the fund's moderate portfolio turnover of 33% as of November 30, 2025.

The fund's capital gains distributions also favor tax-conscious investors. In 2025, FNDC's distributions were composed entirely of income rather than capital gains, reducing the tax burden for shareholders. This outcome contrasts with many actively managed or derivative-heavy strategies, which often generate higher capital gains distributions. For instance, only 6% of U.S. ETFs projected capital gains distributions in 2025, with just 2% exceeding 1% of net asset value. FNDC's structure, therefore, not only aligns with smart beta principles but also enhances after-tax returns-a critical differentiator in a low-yield environment.

Tax-Loss Harvesting in a Volatile Year

The tax advantages of FNDC were further amplified by the market turbulence of 2025. A sharp equity selloff triggered by tariff-related events in early April created fertile ground for tax-loss harvesting. Investors leveraging direct indexing-where individual securities mirror an index- realized losses at rates exceeding 5% to 20% of portfolio value. While FNDC itself is an ETF, its moderate turnover and exposure to volatile small-cap markets make it a complementary asset for investors employing systematic tax-loss harvesting strategies.

For example, Parametric Portfolio Management reported realizing $330 million in net losses through Q3 2025 for fixed-income strategies, illustrating the scalability of such approaches. Though FNDC's equity focus differs, its structure allows for similar opportunities, particularly in periods of rapid price swings. The fund's liquidity profile, combined with its fundamental-weighted approach, ensures that rebalancing and harvesting can occur without compromising exposure to its core thesis.

Conclusion: A Strategic Fit for Disciplined Investors

FNDC's dual strengths-contrarian value alignment and tax efficiency-make it a standout option for investors seeking to navigate the complexities of global small-cap markets. By leveraging fundamental weighting and disciplined rebalancing, the fund captures the long-term outperformance of value stocks while minimizing the drag of market-cap distortions. Its tax profile, bolstered by low turnover and income-focused distributions, further enhances its appeal in a tax-sensitive landscape.

As 2025 draws to a close, the fund's 35.64% annualized return and robust tax management underscore its potential as a cornerstone of a diversified portfolio. For those willing to embrace a patient, rules-based approach, FNDC exemplifies how smart beta strategies can evolve to meet the demands of modern investing.