International equities have long been a source of frustration for investors, but with the right strategy, such as the Principal International Multi-Factor Core Index ETF (PDEV), frustration can turn into an opportunity.
PDEV is designed to provide broad index-aware developed international equity exposure while incorporating a multi-factor model and modified the weighting process to potentially enhance the risk/return profile. Multi-factor model seeks to identify equity securities of companies in the Nasdaq Developed Market Ex-US Ex-Korea Large Mid Cap IndexSM that exhibit potential for high degrees of sustainable shareholder yield (value), pricing power (quality growth), and strong momentum. The fund’s objective is to track the Nasdaq Developed Select Leaders Core Index.
A primary source of PDEV’s advantages is derived from its status as a diversified ETF.
“Investors in highly specialized categories–such as funds focusing on Japan, Latin America, Europe, or China–have suffered the biggest investor return gaps, but those investing in broadly diversified categories–such as foreign large blend and world large stock–have fared significantly better,” notes Morningstar analyst Amy Arnott.
Pluses With PDEV
Through a multi-factored approach, PDEV attempts to deliver enhanced returns and maximize diversification in an attempt to provide potentially improved risk-adjusted returns, compared to traditional market-capitalization-weighted indices.
PDEV’s index uses a quantitative model designed to identify equity securities of companies in the Nasdaq Developed Market Ex-US Ex-Korea Large Mid Cap Index that exhibit potential for high degrees of sustainable shareholder value, growth, and strong momentum. PDEV’s quality traits serve to reduce volatility, which is vital when investing outside the U.S.
“Funds with the lowest volatility generally had narrower return gaps compared with higher-volatility offerings. For international-equity funds, funds in the least-volatile quintile had investor return gaps of negative 0.51%, compared with negative 2.39% for those in the most-volatile quintile,” according to Arnott.
Prosaic multi-factor multi-factor ETFs select companies through exposure to a subset of multiple market factors, including low volatility, momentum, quality, size, and value factors. Investors can use these multi-factor strategies to capitalize on the cyclicality of factor performance through a dynamic overlay that screens for leading economic indicators and market sentiment to gauge the current market environment and increase exposure to the areas that tend to fare best in the given conditions.
Fees matter, too, and at 0.25% per year, PDEV is reasonably priced among smart beta international strategies.
“In the semiannual Morningstar Active/Passive Barometer study, for example, we found that success rates (defined as the percentage of funds that generated better returns compared with the average passively managed fund) were significantly stronger for funds with lower costs,” notes Arnott. “Favoring low-cost funds won’t necessarily improve your dollar-weighted returns, but it can help tilt the odds in your favor with respect to underlying fund performance.”
For more on multi-factor strategies, visit our Multi-Factor Channel.
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.