With developed markets, ex-US equities offering an array of alluring traits right now, the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (NYSEArca: TLTD) is an ETF for investors looking for broad-based exposure.

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.

With valuations compelling, there are multiple reasons why TLTD is attractive in the current environment.

“Adding international exposure is one of the first steps toward a diversified portfolio. Even minimalist investors usually carve out a portion of their portfolios for non-U.S. stocks after adding exposure to domestic stocks and bonds,” writes Morningstar analyst Amy Arnott. “International stocks are subject to myriad factors that can lead to divergent performance, including local market conditions, currency movements, exposure to different sectors and industries, and political and economic factors. These traits mean they often show different performance patterns–both relative to the U.S. market and versus other international markets.”

Talking TLTD for International Diversification

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.

Diversification is increasingly important when considering the state of international equity correlations to other markets, including the U.S.

“With the novel coronavirus pandemic affecting economies, companies, industries, and people on a global scale, most major international markets dropped at least as much as the U.S. market in early 2020,” notes Arnott. “Japan was the only major regional market to maintain a lower correlation with the United States. It also suffered lighter losses than most other global markets.”

TLTD, which sports a dividend yield of 2%, is higher by 9.17% year-to-date.

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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.