At a time when traditional cap-weighted developed markets ETFs are trailing their U.S. rivals, some alternatively-weighted strategies may require closer examination by investors looking to add ex-US exposure.
That includes the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (NYSEArca: TLTD).
On the surface, TLTD, which carries an annual expense ratio of 0.42% looks like a standard EAFE ETF due to its noticeable allocations to Japan and Australia, among other developed markets. However, TLTD does feature a legitimate “tilt” and it is toward “smaller-cap and value stocks using a multi-factor modeling approach that attempts to enhance portfolio risk/return characteristics,” according to FlexShares.
Home to over 2,700 stocks, a lineup that is broader than some rival developed markets funds. The $937.8 million TLTD is up about 10% year-to-date.
Time To Talk TLTD
TLTD could provide better risk-adjusted returns than the broader large-cap benchmark. Specifically, its enhanced indexing process would allow the ETF to exclude expensive, low-quality companies with poor momentum.
Factor-based strategies like smart beta ETFs can be used to solve different portfolio needs. For instance, single factors help target exposure to enhance returns or address specific client needs, whereas a multi-factor approach may provide a diversified core equity allocation that leverages the benefits of multiple factors and limit cycle risks associated with individual factors.
Importantly, TLTD allocates nearly half its weight to value stocks at a time when that group is showing signs of life.
Related: Tilted ETF Positions For Emerging Markets Rally
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations.
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, but TLTD’s multi-factor approach can give investors the “goods” they’re looking for on an international basis.
Adding to the case for ex-US equity ETFs, such as TLTD, is the increasingly dovish posture of the Federal Reserve along with the same by major ex-US central banks, such as the ECB.
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