Investors this year can’t be blamed for being concerned about investing abroad. From the Russian invasion of Ukraine and the energy crisis it has sparked to global inflation spiking after the pandemic’s heights, foreign equities are caught in quite a bit of uncertainty. But with that uncertainty comes opportunity via an active fundamentals ETF like the FCF International Quality ETF (TTAI).
Active investing outside the U.S. isn’t always easy, with complicated local factors to consider. But with foreign large blend strategies picking up flows this past month, adding $5 billion according to YCharts, active strategies could be positioned to outperform, especially those with consistent ideas about evaluating foreign equities.
TTAI, from FCF Advisors aims to outperform the MSCI All Country World ex USA Index via a quantitative model that ranks stocks based on its proprietary analysis of each firm’s free cash flow. TTAI screens firms that are highly leveraged or that incur debt to buy back shares, instead choosing about 150 of the best stocks after that screen and weighting them based on free cash flow.
TTAI uses FCF Advisors’ trademark free cash flow analysis, which prioritizes a firm’s free cash numbers rather than other accounting-oriented indicators like GAAP earnings can be impacted by management manipulation, a problem exacerbated by navigating foreign firms’ varied approaches to reporting data. By combining a free cash flow factor assessment with accruals, TTAI aims to identify companies worldwide with sustainable profitability.
The ETF has returned 4.8% over one month, much improved compared to its three-month return of -10%. TTAI charges 61 basis points for its active management approach, with none of its holdings weighted at more than 3.2%, the amount at which Novo Nordisk, Inc. (NOVO.B) is held. TTAI also holds a 2% weight towards the U.S. dollar in attention to several foreign banks and logistics firms in its top 15 holdings.
As uncertainty persists, foreign equities may be primed to rebound at the turn of the year. Investors eyeing an active approach to foreign markets, including some reliable large caps, should follow active fundamental ETFs that back themselves to outperform the indexes.
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