An International Passive ETF That Implements Active Screens

When looking to overseas markets, people have to consider the various risks associated with each sector and country. Alternatively, investors can look to a broad exchange traded fund strategy that focuses on high quality international names with sustainable advantages.

On the recent webcast, ETF Strategy to Access Morningstar’s Top International Picks, Dan Lefkovitz, Content Strategist for Indexes Morningstar, pointed out that investment returns across various foreign countries has been uneven as various macroeconomic and geopolitical forces may weigh on returns.

For example, in the 2011 to 2015 period, emerging markets have returned a minus 3.8%, whereas U.S. markets returned 12.3%.

Nevertheless, when crafting a diversified investment portfolio, investors should not completely write off foreign exposure. If an investor allocates his or her portfolio by global market capitalization, the U.S. stock market makes up 53.1% of the global market-cap, along with 16.2% Europe ex-United Kingdom, 10.9% Asia ex-Japan, 8.1% Japan, 6.7% U.K., 2.8% Canada and 1.1% Latin America. Investors would also miss potential opportunities from a number of large international brands.

On a survey of advisors attending the webcast, 36.8% of respondents said they are thinking of increasing their international equity exposure in the second half of 2016, followed by 35.6% who will keep positions as is.

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Due to the diverse nature of the international markets, active management has been more successful in generating alpha, or outperformance, in the international category, according to Morningstar data. The majority of advisors on the webcast also share this view point, with 61.0% of respondents using mutual funds as a means to access international equities, followed by 30.2% in ETFs.

Alternatively, investors can follow a customized index-based strategy that implements actively managed styles in a passive investment wrapper to potentially generate alpha with international exposure.