With more looking to foreign markets as a way to diversify away from U.S. equities, investors will face certain risks associated with international exposure. Nevertheless, there are a number of smart beta global exchange traded fund strategies that can help investors better manage risks.
Most investors would typically turn to a traditional, beta index fund strategy to garner global market exposure. However, these market cap-weighted indexing methodologies may cause investors to become exposed to some of the largest companies that have grown the most or become too focused on only a handful of countries.
“Emerging market cap-weighting has very lopsided exposure,” Theodore Lucas, Head of Systematic Strategies and ETFs at Hartford Funds, told ETF Trends in a call, pointing out that major index providers like MSCI are overweight China, South Korea and Taiwan.
The MSCI Emerging Markets Index includes a heavy 28% toward China, along with 15% South Korea and 12% Taiwan.
Alternatively, a smart-beta, multi-factor emerging market indexing methodology, such as one found in the Hartford Multifactor Emerging Markets ETF (NYSEArca: ROAM), could provide more exposure to less mature economies with a greater potential for further growth. ROAM’s top country holdings include Taiwan 10.2%, South Korea 9.4%, Thailand 8.3%, Malaysia 7.6% and Indonesia 7.2%.
The Hartford ETFs screen components quality, momentum and value for more favorable risk-adjusted returns.
“Our approach seeks to provide more analytical procedures,” Lucas said, adding that the strategies hone in on areas that are more underallocated. The multi-factor ETFs “think about returns in a risk creative way.”
Specifically, the funds all share a security selection criteria broken by 50% value, 30% momentum and 20% quality. Additionally, the funds may also include the size and volatility factors where size refers to smaller companies historically outperforming and volatility covering companies that have exhibited a history of smaller swings.
Hartford’s line of multi-factor ETF strategies also include the Hartford Multifactor Developed Markets (ex-US) ETF (NYSEArca: RODM), Hartford Multifactor US Equity ETF (NYSEArca: ROUS), Hartford Multifactor Global Small Cap ETF (NYSEArca: ROGS) and Hartford Multifactor REIT ETF (NYSEArca: RORE),
For more information on alternative index-based strategies, visit our smart beta category.