Tilt Your Factor Exposure Toward Developed Markets

Tactical factor exposure to developed markets outside of the United States can be had with the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (TLTD).

TLTD seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar® Developed Markets ex-US Factor Tilt Index. The index reflects the performance of a selection of companies that, in aggregate, possess greater exposure to size and value factors relative to the Morningstar Developed Markets ex-US Index, a float-adjusted market-capitalization weighted index of companies incorporated in developed-market countries, excluding the U.S.

With a number of opportunities to be had in developed markets, TLTD scours the globe for opportunities in various sectors and market capitalization sizes.

“The index starts with a broad universe of international stocks that trade on a qualified exchange in one of 23 developed markets ex-U.S. countries,” the FlexShares website noted. “Stocks are then defined and divided by current market capitalization when Morningstar applies a multi-metric valuation analysis to determine appropriate style categorization.”

“Morningstar then constitutes the index with an intentional tilt toward small-cap and value stocks,” the website explained further. “For example, the index will reduce weight in the large-cap growth and large-cap core boxes to increase weight across the smaller and value portions of the index.”

A Dynamic Solution to Value

Different economies often have different factors working for them simultaneously. Developed markets can also serve as a tactical diversification tool and hedge to a U.S.-skewed portfolio.

“With the value and size factors off to a strong start this year, we’ve had many conversations with clients about our Factor Tilt ETFs,” a FlexShares “Fund in Focus” blog post explained. “The funds incorporate both value and size into their methodology by adjusting the weights of the investable stock universe—as defined by Morningstar—such that there’s an incremental increase in the weight of smaller and undervalued companies. The approach classifies companies into market capitalization bands, and then uses five valuation metrics to value companies within each band.”

“The result of this methodology is ETFs covering US, developed, and emerging markets that offer prolonged factor exposure for a core allocation—without introducing the risk and complexity of timing factor performance,” the blog post said further.

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