Market Overview

Don't Bark At This Unique International ETF

Don't Bark At This Unique International ETF

International stocks, both developed and emerging markets, disappointed investors in 2018. Last year, the MSCI ACWI ex USA Index lost 13.9 percent, or about triple the loss incurred by the S&P 500.

What Happened

While international stocks and the relevant exchange traded funds clearly slacked last year, the group's laggard status prompted an array of calls noting international equities were attractive on valuation and that the asset class had the look of a rebound play for 2019.

Adventurous investors looking for opportunities in international equities this year may want to consider some of last year's worst geographic offenders. The Arrow Dogs of the World ETF (NYSE: DOGS) makes that task easier. DOGS, which is about a year old, follows the AI Dogs of the World Index.

“The index selects the five worst performing countries where a return reversal or move back toward the mean (or average) is anticipated,” according to Arrow Funds.

Why It's Important

The selection universe for DOGS is 44 countries, including developed, emerging and frontier markets. Last year, DOGS topped the MSCI ACWI ex USA Index due in part to its large allocations to Qatar and Israel, countries that at the end of the third quarter combined for 52.4 percent of the fund's weight. Qatar was one of 2018's best-performing emerging markets while Israel was one of the year's steadier developed economies.

“For 2018, DOGS ranked 69th out of the more than 1,600 international funds on the market and #2 in the foreign large value category,” according to the issuer.

DOGS is off to a strong start this year, having jumped nearly 7 percent since the start of 2019.

What's Next

The DOGS approach is rooted in mean reversion, one of the oldest and most widely studied financial market phenomenons.

“One fundamental reason to explain the mean reversion anomalies across countries is insufficient cross-border equity flows due to investors' fears of capital controls,” according to Arrow Funds. “Another explanation is behavioral biases in investors' behavior.”

The rub with DOGS is its high fee of 2.04 percent per year, or $204 on a $10,000 investment, which is well above the category average.

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