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Factoring Factors Into International ETFs

June 28, 2017 12:00 pm
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Factoring Factors Into International ETFs

Exchange-traded funds tracking ex-U.S. developed market equities are among the hottest corners of the ETF space this year. Investors are pouring billions of dollars of new assets into these ETFs in search of value plays not involving pricey U.S. equities.

As is the case with U.S. equity ETFs, investors often favor old school, cap-weighted funds when looking for developed markets exposure. However, there are some credible ideas among smart beta, multifactor developed markets ETFs. That group includes the SPDR MSCI EAFE StrategicFactors ETF (NYSE:QEFA).

QEFA follows the MSCI EAFE (Europe, Australasia, Far East) Factor Mix A-Series Index. The ETF's geographic lineup is similar to traditional EAFE approaches with the U.K., Japan and Switzerland dominating at the country level.

A Multifactor Advantage

QEFA adheres to a mutli-factor methodology, which helps investors skirt the need for timing individual factors, such as low volatility, quality and value.

“The SPDR StrategicFactors suite seeks to track indices that blend low volatility, quality and value exposures together in a single strategy. The combination of one risk-based factor aimed at reducing absolute risk levels (low volatility) with two return-based factors (value, which is cyclical, and quality, which is defensive) creates a balanced, diversified exposure that may provide a better buy-and-hold core exposure than traditional market cap-weighted strategies, assisting investors with constructing portfolios that are better suited for today’s equity market conditions,” according to State Street Global Advisors (SSgA).

Over the long-term low volatility, quality and value are often stout performers, but over short periods, factors can be cyclical “and individual factors can and do experience periods of underperformance relative to market cap weighted indices, making them difficult to time correctly,” noted SSgA.

A Familiar Recipe

QEFA, which turned three years old earlier this month and has about $150 million in assets under management, has a familiar geographic lineup as Japan, the U.K. and Switzerland combine for about 55 percent of the ETF's weight.

QEFA's strategy is working. Since coming to market just over three years ago, the ETF is up 1.1 percent while the MSCI EAFE Index is down 6 percent over the same period.

The ETF holds about 560 stocks with a weighted average market value of $54.5 billion. Financial and consumer staples names combine for about a third of the ETF's weight. Industrial and healthcare stocks combine for another 28 percent.

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