A Surging Smart Beta Idea For Ex-US Exposure

With ex-US developed markets equities surging and presenting investors with compelling value relative to expensive U.S. stocks, the time is right to consider alternative strategies, including multi-factor exchange traded funds. That conversation should include the Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF).

DEEF can be used as a complement or alternative to traditional MSCI EAFE strategies. In either case, the Deutsche ETF is rewarding investors this year. After recently making a series of new highs, DEEF is higher by about 19% year-to-date, outpacing the MSCI EAFE Index by more than 300 basis points since the start of 2017.

When combining multiple factors, an ETF may take an additive or multiplicative approach. An additive approach would just equally weight the various factors, but this approach runs the risk of diluting factor exposure. The multiplicative approach would overweight stocks that tend to exhibit the stocks with the combined various factors, which may lead to more concentrated factor bets.

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.