A newcomer brings a different take on international equities ETFs to the market.
Vident Financial, a Georgia-based newcomer to the world of ETFs, today launched its first ETF, an international ex-U.S. equities fund that will enter a segment populated by the likes of the $2.2 billion Vanguard Total International Stock Fund (VXUS | B-95) and a pair of FlexShares ETFs, to name a few.
To be fair, the Vident International Equity Fund (VIDI) doesn’t seem to be quite like any of its competitors. Tracking a proprietary index, the fund sets out to invest in international equities through a complex methodology that takes into account fundamentals such as debt-to-GDP ratios, valuation as well as risk to determine each company’s—and each country’s—weighting in its risk-weighted portfolio.
At the end of the day, VIDI seeks companies it believes show the best growth prospects based in part on the economic, fiscal and political environment of each country, all in a strategy that’s designed to capture excess long-term returns relative to market-cap-weighted funds. The firm frames its unique approach as “principled investing.”
At launch, the fund has about 27 percent of the portfolio tied to emerging Asia, 25 percent to developed Europe and 10 percent to Latin America, among others. The largest single-country allocation is capped at 5 percent, and the top 10 countries represent just over a third of the portfolio.
VIDI comes to market with one of the highest management fees in the segment—0.75 percent, or $75 per $10,000 invested, a year. Still, as IU’s Senior ETF Specialist Paul Britt pointed out, that cost is competitive compared with what investors would have to shell out for similar exposure in the active management space. By comparison, Vanguard’s VXUS costs just 0.16 percent.
There’s no question that investor appetite for exposure to international equities is strong, particularly since the U.S. Federal Reserve renewed its commitment to keep its easy money policies in place in the U.S., easing concerns globally that capital flows might dry up if the Fed tapered the so-called quantitative easing.
In the third quarter alone, investors poured more than $22 billion into international equities funds, making it the second-most-popular asset class that quarter, which now represents about a fifth of all U.S.-listed ETF assets, according to data compiled by IndexUniverse.
Vanguard’s VXUS tracks a market-cap-weighted index of global stocks covering 99 percent of the world’s global market capitalization outside the U.S. With its 0.16 percent expense ratio and an average trading spread of 7 basis points, the broad exposure VXUS offers is even more comprehensive than its sister $11.2 billion Vanguard FTSE All-World Ex-US Fund (VEU | B-92).
Still, VEU is the bigger, more liquid and cheaper, of the two funds, with an annual expense ratio of 0.15 percent. Both VXUS and VEU have seen total returns of roughly 13 percent year-to-date.
Perhaps the closest competitor for VIDI today is a pair of FlexShares ETFs that isolate “quality” and “dividends”—implying a focus on fundamentals—as well fine-tuned exposures to risk relative to the rest of the market.
The FlexShares International Quality Dividend Defensive ETF (IQDE | D-70) tracks an index of non-US companies from developed and emerging markets selected by dividend payments and other fundamentals. The index aims for lower market risk, much like VIDI.
Similarly, the FlexShares International Quality Dividend ETF (IQDF | C-73) tracks an index of non-U.S. companies from developed and emerging markets selected by dividend payments and other fundamentals.
The index aims for market-like risk. Also at 0.47 percent in expense ratio, it has $65 million in assets.
But it’s worth pointing out that despite FlexShares’ success in other ETFs, these two remain at closure risk, according to data compiled by IU’s ETF Analytics unit, particularly IQDE which now has only $16 million in assets. They each have annual expense ratios of 0.47 percent, or $47 for each $10,000 invested.