Overseas investments, though, are not without their risks. For instance, currency volatility, high debt-to-GDP, country concetnrations and political risks, among others, are some risks that investors should keep in mind.
Nevertheless, Darek Wojnar, Managing Director and Investment Committee Member for Lattice Strategies, believes investors can diminish investment risks through factor-based investment strategies.
For instance, Lattice Strategies offers three separate smart-beta index-based ETFs, including the Lattice Developed Markets (ex-US) Strategy ETF (NYSEArca: RODM), Lattice Emerging Market Strategy ETF (NYSEArca: ROAM) and Lattice Global Small Cap Strategy ETF (NYSEArca: ROGS).
Specifically, the smart-beta ETFs try to improve risk and return potential by focusing on deliberate risk allocation, diversification and enhanced return potential. The underlying benchmarks try to limit volatility and drawdown risk. The ETFs may also offer greater diversification benefits by de-concentrating country, currency and individual company risks. Lastly, the funds can generate better risk-adjusted returns by focusing on companies with improved value, momentum and quality.
Through the indexing methodology, the Lattice ETFs may help improve diversification and potentially enhance returns relative to traditional market cap-weighted index funds. For instance, RODM has smaller country tilts toward major developed markets like Japan, U.K., France and Switzerland than traditional EAFE Index funds and also includes a 11.2% tilt toward Canada. ROAM intentionally de-emphasizes China, South Korea and Taiwan – some of the largest country tilts in major emerging markets indices – and reallocates toward countries in the earlier phases of growth.
Furthermore, due to their alternative indexing methodologies, RODM and ROAM would both have a greater value tilts and cheaper valuations than traditional benchmarks. Specifically, RODM shows a 1.46 price-to-book and 13.05 price-to-earnings, whereas cap-weighted indices have a 1.53 P/B and 16.35 P/E. ROAM has a 1.25 P/B and a 9.78 P/E, compared to cap-weighted benchmarks’ 1.26 P/B and 11.57 P/E.
Financial advisors who are interested in learning more about investing in international markets can listen to the webcast here on demand.