Factor-based investing has demonstrated its ability to create new opportunities for U.S. investors by identifying and over-weighting certain elements in the stock selection process for the indexes underlying exchange-traded funds (ETFs). These elements have included everything from dividends and “quality” to value and momentum.
Many of these factors are now starting to head abroad, and are turning up in the construction process for global and international ETFs.
Do they travel well?
Of course it depends on the factor, but as a general matter we think yes. In fact, in some instances international markets may be less efficient than those in the U.S., creating a dislocation in prices that can be exploited more efficiently by a factor-based approach.
In one such case, we’re applying these ideas to the index underlying the IQ 500 International ETF (IQIN), which uses a rules-based methodology incorporating three fundamental factors: sales, market share, and operating margin.
Based on this selection criteria, we then identify and include the top 500 large cap international companies in the index, based on their composite rank. The fund is diversified by country and sector and is meant to serve as a core international holding.
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