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Market Overview

A Dandy Developed Markets ETF

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A Dandy Developed Markets ETF

Ex-U.S. developed markets equities and related exchange traded funds are delivering tepid year-to-date performance: for example, the widely followed MSCI EAFE Index is up just 0.5 percent this year.

Lethargic performances are not deterring investors. Through nearly five months, some of this year's top ETFs in terms of new assets added are ex-U.S. developed markets funds. Investors looking for a non-traditional play on this asset class may want to consider the PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio (NYSE: PXF).

What Happened

“Non-traditional” is not a mark against PXF, nor does it imply the fund is complex, opaque or worse. Although PXF is not a cap-weighted ETF, its strategy is straightforward.

PFX, which is a month away from its 11th birthday, follows the FTSE RAFI Developed ex U.S. 1000 Index. The benchmark is “designed to track the performance of the largest developed market equities (excluding the U.S.), selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends,” according to PowerShares.

PXF's nearly 1,030 holdings are weighted based on fundamental scores derived from the aforementioned factors.

Why It's Important

PXF is slightly trailing the MSCI EAFE Index year-to-date, but over longer periods, the PowerShares fund has the potential to separate itself from standard developed markets strategies. Over the past 36 months, PXF is ahead of the MSCI benchmark by nearly 200 basis points with only slightly higher volatility.

There are inklings of increasing interest. The fund has seen inflows of nearly $105 million over the past month, representing a decent percentage of PXF's $1.29 billion in assets under management.

What's Next

PXF would benefit from a credible resurgence by value stocks. Over half the fund's holdings are considered large- and mid-cap value plays. The ETF shares some sector attributes in common with domestic value funds, as the financial services and energy sectors combine for nearly 37 percent of PXF's roster.

PXF is not currency hedged, but several of its country weights stand to benefit from the stronger dollar. Notably, Japan is the fund's largest country exposure at 21.3 percent, while Eurozone economies combine for nearly 28 percent of the ETF.

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