International equities performed admirably in 2019 but still trailed their U.S. rivals. With valuation in markets outside the U.S. still attractive, 2020 could bring out-performance for some developed markets strategies.
One way of playing that theme is with the John Hancock Multifactor Developed International ETF (NYSEArca: JHMD). Investors can gain exposure to international markets through a number of ETF strategies, but the majority follow market capitalization-weighted methodologies that may overweight toward overbought segments of the global economy, but JHMD may prove to be a better mousetrap in 2020.
JHMD tries to reflect the performance of the John Hancock Dimensional Developed International Index. The underlying index is comprised of developed market companies outside the U.S. and Canada, and it also implements a Dimensional Fund Advisors’ rules-based or multi-factor screening process that singles out small-caps, lower relative prices and higher profitability.
JHMD’s “portfolio offers well-diversified exposure to overseas developed markets while targeting factors that have been associated with market-beating returns,” said Morningstar in a recent note. “The index it tracks uses market-cap multipliers to scale each stock’s weight based on its valuation, market capitalization, and profitability. It assigns larger multipliers to stocks with relatively lower valuations, smaller market capitalizations, and higher profitability than those with the opposite characteristics.”
The $509.38 million JHMD, which is up more than 17% year-to-date, holds 734 stocks and allocates about 42% of its weight to Japan and the U.K.
“Like Dimensional’s International Core Equity Portfolio (DFIEX), this fund has historically emphasized stocks with smaller market capitalizations and those trading at lower valuations,” according to Morningstar. “Its tilt toward profitable firms has been less noticeable because its profitability and value exposures tend to offset each other–stocks trading at lower valuations tend to be less profitable. However, the profitability tilt is still at work and should help steer the fund away from the least profitable companies that find their way into the portfolio.”
According to Dimensional Fund Advisors, when combined, the various factors may help improve a portfolio’s risk-adjusted returns over time. The multi-factor strategies select securities of a specific sector with a desired market capitalization range, with an increased emphasis on higher expected return securities. The securities will exhibit lower relative price, higher profitability and lower market capitalization. Moreover, securities’ weights are capped to diminish concentration.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.