For example, the USAA MSCI International Value Momentum Blend Index ETF (UIVM) combines value and just momentum, yet the John Hancock MultiFactor Developed International ETF (JHMD) mixes value with size and quality.
The PowerShares FTSE RAFI Developed Markets Ex-US Portfolio (PXF) is the lone multifactor ETF to incorporate value with dividend and revenue attributes. PXF was launched in 2007, before investors accepted the combination of value with some other factors.
The JPMorgan Diversified Return International Equity ETF (JPIN) is the largest of the nine international multifactor ETFs evaluated by CFRA; it tracks a FTSE index combining low volatility, momentum, size and value factors. The smallest of the nine is the Xtrackers FTSE Developed Ex U.S. Comprehensive Factor ETF (DEEF). DEEF incorporates low volatility, momentum, size and value like JPIN, but also adds in quality.
Meanwhile, the Goldman Sachs ActiveBeta International Equity ETF (GSIE) and the iShares Edge MSCI Multifactor ETF (INTF) use momentum, quality and value traits. GSIE tracks a proprietary index that includes low-volatility attributes, while INTF replicates an MSCI index that instead folds in the size factor.
Similar Sounding But Different
What's inside similar-sounding ETFs is different. Market-cap-weighted IEFA and VEA are simply constructed based on company size, with large positions in Nestle and Novartis.
In contrast, factor using ETFs tilt toward and away from certain sectors. As shown in the image below, DEEF and INTF are heavily weighted to industrials and underexposed to consumer staples and health-care stocks. Aerospace and defense companies BAE Systems and Thales S.A. are some of INTF's industrial holdings.
Industrials A Favored Sector (% of assets)
At the sector level, DEEF and INTF had 23% and 19% of assets in industrials at the end of the first quarter, respectively, above the 15% stake in market-cap-weighted VEA and IEFA. In contrast, GSIE had a 14% position in the sector.
DEEF and INTF were underexposed to health care (4% vs. 9% for market-cap-weighted examples), but there were other distinctions. The iShares offering was significantly underweighted to consumer staples (5.5% vs. 10%), while DEEF had a 9% stake.
Meanwhile, pharmaceuticals and packaged food companies are underweighted in those two multifactor ETFs.
However, not all multifactor ETFs find the same investment opportunities within a sector. While GSIE has only 10% in health care stocks, 7% of assets are in pharmaceuticals, including top-10 holdings Novartis, Novo Nordisk and Roche Holdings. GSIE does not include a low size factor as some of its peers do.
France was favored over Germany and Switzerland. Both GSIE and INTF had an 11% stake in French stocks, more than VEA and IEFA. Meanwhile, JPIN had only 2.2% and 4.4% weightings, respectively, in Switzerland and Germany, below market-cap-weighted peers.
In the first quarter, these and other multifactor index ETFs lost less than IEFA/VEA despite charging a higher expense ratio, highlighting the differences and benefits of multifactor developed international strategies.
At 8-9% of assets, France is one of the larger countries for market-cap-weighted ETFs, but many multifactor ETFs have a heftier stake. UIVM had the largest stake (12% of assets), followed by GSIE and INTF, as shown in the chart below. There was disparity toward Germany among the ETFs, with JPIN (4%) and DEEF (6%) being offset by JHMD (10%) and PXF (9%).
France Favored Over Germany (% of assets)
However, regarding Japan exposure, all nine smart-beta funds were aligned with VEA and IEFA, holding a 20-plus percentage of assets in Japanese companies.
While investors should not rely on past performance in selecting an ETF, particularly for a short period, the record suggests multifactor ETFs could serve as either a replacement or a complement to a market-cap-weighted international equity index strategy.
We expect the collective asset bases for international multifactor ETFs to climb higher as familiarity and comfort with these strategies grow.
CFRA provides research and ratings on these and other multifactor ETFs available on MarketScope Advisor. We combine our proprietary holdings-level analysis with key fund attributes such as expense ratio and bid/ask spread to generate our proprietary ETF rankings.
At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him on Twitter @ToddCFRA.