Putting Factors to Work Outside the U.S. | ETF Trends

The utility of multi-factor ETFs isn’t confined to domestic equities and the Principal International Multi-Factor Core Index ETF (PDEV) is proof positive of that assertion.

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.

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.

Momentum investing can target those companies that are exhibiting high levels of growth. The momentum factor selects company stocks that have recently outperformed based on the idea that “the trend is your friend” and that stock market leaders typically continue to outperform. This type of strategy can be an effective way of targeting growth-oriented companies since stocks with positive momentum often continue to generate strong earnings.

PDEV Perks

PDEV can potentially provide investors efficient access to international developed stocks with relatively low tracking error to the international developed market. Its innovative factor definitions and combinations may enhance the risk/return profile without significantly differing from the targeted index holdings. Finally, its index-aware design may make PDEV an attractive replacement for passive, cap-weighted and active strategies.

Home to 602 stocks with an average market capitalization of $24.58 billion, PDEV allocates about 46% of its combined weight to financial services, healthcare and industrial stocks. PDEV is designed to provide broad developed international equity exposure while incorporating a multi-factor model and modified weighting process to potentially enhance the risk/return profile.

Those sector allocations are important because they are strong sources of shareholder yield, one of the factors backstopping PDEV. Investors may find value in companies that maximize their return on investment, or those that provide cash dividend, buy back stocks, pay down debt, execute mergers and acquisitions, and reinvest in the business.

The three components of shareholder yield are good measures for shareholder friendliness. The trifecta helps investors target companies with a history of dividend growth, low debt and the ability to support equity prices through share buybacks.

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.