Todd Rosenbluth is director of ETF and mutual fund research at CFRA.
Various asset managers offer multifactor developed international ETFs, appealing to investors seeking an alternative to an index-oriented market-cap-weighted approach.
These ETFs focus on factors—including momentum, quality, size and value—long used by successful active managers. Yet what's inside these ETFs—at the security, sector and country level—differs greatly from popular international index-oriented market-cap-weighted ETFs, and even from each other.
Here we highlight three themes related to international multifactor ETFs:
- Each provider emphasizes different factors. Low-priced stocks are preferred in all nine multifactor ETFs we review, but the funds blend other ingredients—quality, low size and/or low volatility—to make their offerings unique.
- Multifactor ETFs provide distinct sector exposure. Many multifactor ETFs were highly exposed to industrials and had limited stakes in consumer staples and health care relative to broad international benchmarks.
- Vive la France: Numerous multifactor international ETFs had hefty weights in French stocks, but exposure to Germany and Switzerland was more diverse.
Given the distinct sector and country exposure, due to unique index constructions, there were performance differences among multifactor ETFs and market-cap-weighted alternatives.
CFRA reviewed nine multifactor ETFs that use value as an input.
For a larger view, please click on the image above.
Developed international equity ETFs gathered $20 billion in the first quarter of 2018, far exceeding the $6 billion pulled in by U.S. equity funds. Most of the money flowed into market-cap-weighted international funds such as the iShares Core MSCI EAFE ETF (IEFA) and the Vanguard FTSE Developed Markets ETF (VEA) rather than smaller, but strong-performing smart-beta products.
However, international ETFs that screen using multiple fundamental and technical factors collectively have $5 billion in assets, and CFRA thinks inflows will further accelerate as investors become more comfortable with the multifactor approach and methodology.
Investors embraced developed international equity ETFs in the 15 months ended March 2018—these funds gathered $105 billion in new assets. Strong demand in 2017 persisted in the first quarter of 2018 with the addition of $20 billion in new inflows. Multifactor ETFs pulled in less than 5% of the developed international net inflows, as shown in the table above, but their collective asset bases swelled by 18%.
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.
Evaluating ETFs & Factors
Here are some of CFRA's most significant findings.
How value is combined is in the eye of the provider. While these nine ETFs all use a value factor input, the other ingredients pulled from the cupboard are different. As shown in the table below, four ETFs include low volatility; six include quality; and four include low size, yet there's limited overlap in usage.