Investigating International Factor ETFs | ETF Trends

Investors often display a home country bias, meaning they lean toward equities in their home country. This is true of factors, too. Those looking for value, momentum, or low volatility strategies typically have a bias toward domestic offerings.

However, that bias means investors can miss out on useful ETFs, such as the iShares MSCI International Developed Momentum Factor ETF (NYSEArca: IMTM) and the iShares Edge MSCI Min Vol EAFE ETF (CBOE: EFAV). EFAV tracks the MSCI EAFE Minimum Volatility (USD) Index, a low volatility answer to the widely followed MSCI EAFE Index.

EFAV “seeks to track the investment results of an index composed of developed market equities that, in the aggregate, have lower volatility characteristics relative to the broader developed equity markets, excluding the U.S. and Canada,” according to iShares.

IMTM, which is more than four years old, tracks the MSCI World ex USA Momentum Index and holds 283 stocks. Historical data suggest the momentum factor works in international markets, just as it has proven rewarding with domestic equities.

“As expected, U.S. quality and momentum has outperformed the broader U.S. market over time,” said BlackRock in a recent note. “However, does this return-enhancing behavior of the quality and momentum factors hold in international markets? Indeed, the outperformance of quality and momentum factors has persisted in international markets over time. In fact, from January 2015 through June 2019, the international quality and momentum factors have outperformed the broader market by an average 1.6% and 1.1% per year, respectively.”

Low Volatility Across The Pond

Just as low volatility ETFs are working in the U.S. this year, the same is true of international offerings such as EFAV. EFAV is higher by 10.10%, putting it well ahead of the traditional MSCI EAFE Index. The fund holds 282 stocks, nearly 43% of which are Japanese and Swiss companies.

Related: Low Volatility ETFs for Today’s Trade War-Sensitive Markets 

Historical data indicate that the minimum volatility factor is persistent in markets outside the U.S., too, providing investors with a potentially attractive avenue for increasing international allocations.

“A minimum volatility strategy may be appropriate,” according to BlackRock. “Within the U.S., minimum volatility has historically delivered lower risk than the broader market as observed in the graph below. Notably, we also observe that this demonstrated behavior of lower risk compared to the broader market also persists in international markets. In fact, from February 2012 through June 2019, international minimum volatility has outperformed the broader market by an annualized 2.1% with only 75.6% of the risk. Thus, investors seeking to access international markets with lower risk or desiring to reduce the risk of their existing international allocations may want to consider using a minimum volatility strategy within their portfolios.”

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