As international equities finally have their moment in the sun, investors considering global options may want to take a alternative index based or smart beta exchange traded funds that may potentially limit drawdowns and enhance returns over the long-haul.
For instance, the Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF) has increased 11.1% year-to-date while the MSCI ACWI ex USA Index gained 10.2% and the S&P 500 rose 7.2%.
Factor-based investments or smart beta strategies combines the low-cost, systematic approach found in passive investments, such as an index-based ETF, with research driven benchmark outperformance found in actively managed portfolios and cutting edge alpha capture in alternative strategies. The smart beta ETFs can be seen as an amalgamation of the best qualities found in passive and active strategies.
For instance, DEEF tries to reflect the performance of the FTSE Developed ex US Comprehensive Factor Index, which includes foreign developed market equities but screens for five factors, including quality, value, momentum, low volatility and size, to help diminish risks and to potentially enhance returns. The quality and low-volatility metrics, for example, help diminish drawdowns during periods of large swings, and the value and size factors have been known to capture excess returns over the long haul.
While academic research and historical data have identified factors that are important in explaining a stock’s risk and performance, they do not explain how exposure to these factors could be timed effectively. Consequently, without In compelling evidence around specific timing of the individual factor strategies, investors may consider using a diversified approach to enhance their investment portfolios.
Additionally, among the other smart beta international strategies that have outperformed, the currency-hedged methodology has also helped investors avoid the negative effects of weakening global currencies or a strengthening U.S. dollar. For instance, the Deutsche X-trackers MSCI EAFE Small Cap Hedged Equity ETF (BATS: DBES) increased 13.4% year-to-date, whereas the unhedged MSCI EAFE Small-Cap Index is up 12.7%.
DBES tries to reflect the performance of the MSCI EAFE Small Cap U.S. Dollar-Hedged Index, which includes developed market small-cap stocks but tries to negate exposure to fluctuations between the value of the USD and select foreign currencies. The hedged ETF would outperform similar non-hedged strategies if foreign currencies depreciate against the greenback.
For more information on alternative index-based strategies, visit our Smart Beta Channel.