Schwab to launch fundamental index mutual funds

NEW YORK, March 27 (Reuters) - Schwab Funds is expected to to launch three mutual funds next week that will be based on fundamental indexes, a departure from the capitalization-weighted indexes that are the basis for most stock index funds.

Up to now, fund products using fundamental indexes have been confined to exchange-traded funds and have not been available in the open-end mutual fund format.

A formal announcement of the new funds -- the Schwab Fundamental U.S. Large company Index Fund, the Fundamental U.S. Small-Mid Company Index Fund and the Fundamental International Large Company Index Fund -- is set for Monday.

FTSE Group Americas and Research Affiliates have joined with Schwab to develop the new products.

Critics of capitalization-weighted indexes say that the methodology overweights overpriced stocks and underweights underpriced stocks, creating a drag on returns.

In capitalization-weighted indexes, market price of a company's shares, multiplied by the number of shares, dictates the weight of the company in an index.

Fundamental-weighted indexes take into account factors such as a company's revenue, book value, or earnings.

ETFs based on fundamental indexes developed by FTSE Group and Research Affiliates fundamental are offered by Power Shares Capital Management.

Other offerings of fundamental index ETF products include a group from WisdomTree Investments Inc. (WSDT.PK).

ETFs traded throughout the day on exchanges and are bought and sold through brokers.

Open-end mutual funds typically are priced once a day based on the close of trading. They are bought directly from the fund companies or through advisers.

Schwab Funds are part of Charles Schwab Corp. (SCHW.O).