A Different View On Developed Markets ETFs
Ex-U.S. developed markets stocks and exchange-traded funds have been popular destinations for investors this year as they search for value as the bull market in U.S. equities ages. With year-to-date ETF inflows already over $300 billion as of the end of August, ex-U.S. developed market funds are playing important roles in that asset boom.
Year to date, three of the top 10 asset-gathering ETFs are developed markets funds. That trio follow the popular MSCI EAFE Index, an offshoot of that benchmark or a rival index. Investors can find developed markets opportunity with non-traditional ETFs, such as the First Trust Developed Markets ex-US AlphaDEX Fund (NASDAQ:FDT).
FDT, which turned 6 years old earlier this year and has nearly $572 million in assets under management, tracks the NASDAQ AlphaDEX Developed Markets Ex-US Index.
A Fine Alternative
FDT can be seen as a smart beta alternative to traditional EAFE strategies. As is the case with the AlphaDEX ETFs, FDT's components are selected based “on growth factors including 3-, 6- and 12-month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets. All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. A stock must have data for all growth and/or value factors to receive a rank for that style,” according to First Trust.
This year, it is hard to argue with the results delivered by FDT. Year to date, the ETF is up nearly 24 percent while the MSCI EAFE Index is up nearly 18 percent. The competing Vanguard ETF is up just over 18 percent.
A Different Beast
FDT allocates over a quarter of its weight to Japanese stocks, a significant overweight to the world's third-largest economy relative to the MSCI EAFE Index. Due to the fact that FDT does not track an MSCI index, it can include South Korean stocks. Asia's fourth-largest economy accounts for almost 13 percent of FDT's weight. MSCI classifies South Korea as an emerging market.
Hong Kong, France and the U.K. combine for about 27 percent of the ETF's weight. FDT's U.K. exposure is underweight what is found in competing developed markets strategies.
The ETF devotes over 38 percent of its weight to consumer discretionary and industrial stocks. Materials and real estate names combine for about 28 percent. FDT has a dividend yield of about 2.3 percent. The ETF hit an all-time high last Friday.
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