Investing International Multi-Factor ETFs
As is to be expected, different issuers of exchange-traded funds employ different methodologies with multi-factor ETFs. That's true with international funds in this group, too. One issuer's international multi-factor products may use the low volatility, quality and size factors while another's may emphasize dividends, growth or value.
It's often used, prosaic advice, but at a time when investors are flocking to ex-U.S. equity ETFs, knowing what's inside international multi-factor fare is important. A recent report by CFRA Research highlights nine international multi-factor ETFs that all include value as one of the factors.
Each of those funds added assets in the first quarter, led by the JPMorgan Diversified Return International Equity ETF (NYSE:JPIN) and the iShares Edge MSCI Multifactor Intl ETF (NYSE:INTF) with inflows of $247 million and $220 million, respectively.
INTF, which is nearly three years old, tracks the MSCI World ex USA Diversified Multiple-Factor Index. The ETF holds 216 stocks and focuses on the quality, value, size and momentum factors.
JPIN, which turns four in November, follows the FTSE Developed ex-North America Diversified Factor Index and focuses on the value, low volatility, momentum and size factors. Over the past year, INTF is up 21.4 percent, outpacing the rival JPIN by 500 basis points.
Why It's Important
“Strong demand in 2017 persisted in the first quarter of 2018 with the addition of $20 billion. Multi-factor ETFs pulled in less than 5 percent of the developed international net inflows,” said CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth in the report. “Many of these funds are less than three-years old and we expect demand to persist throughout the year and into 2019 as educational efforts continue. However, investors should not expect these ETFs to rise and fall in tandem as they are constructed differently.”
Rosenbluth notes that many developed market international multi-factor funds feature large exposures to France, the Eurozone's second-largest economy. France accounts for nearly 12 percent of INTF's weight and 6 percent of JPIN. These funds and their rivals are also usually heavily allocated to Japan and the U.K. Those two countries combine for over 45 percent of JPIN and 42.7 percent of INTF.
Among the nine international multi-factor ETFs reviewed by CFRA, all have exposure to the value factor while six employ the momentum and six use the quality factor.
JPIN and INTF both feature momentum and value. Nearly all of the ETFs highlighted by CFRA featured larger exposure to French stocks than to German and Swiss equivalents. For example, JPIN devotes just 6.7 percent of its combined weight to Germany, the Eurozone's largest economy; and Switzerland.
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