3 Views On Best Way To Own Int'l Equities

April 20, 2017

International equity ETFs have already attracted nearly $40 billion in fresh net assets in the first quarter of the year alone, and demand for exposure to foreign equity markets continues to be strong.

Fading enthusiasm over the new U.S. administration’s ability to implement reform, as well as strong performance outside the U.S., are some of the factors fueling this demand.

Consider that the frontier-focused iShares MSCI Frontier 100 ETF (FM), for example, has shelled out about three times the returns of the SPDR S&P 500 (SPY) year-to-date. The developed-market ex-U.S. fund iShares MSCI EAFE ETF (EFA) and the emerging market iShares Core MSCI Emerging Markets ETF (IEMG) are also outperforming SPY this year, as the chart below shows: 

Chart courtesy of StockCharts.com

We asked ETF strategists for their views on international equities right now, how they go about accessing this space, and for some of their favorite ETFs. Here’s what they said:

Ben Lavine, CIO, 3D Asset Management; Hartford, Connecticut

We manage global equity ETFs, with MSCI ACWI serving as our primary benchmark. For global equities, we allocate at the regional level, and then at the smart-beta or factor level.

For regional allocation, we split the global markets between U.S., ex-U.S. developed, and emerging. We believe in global diversification, so it makes sense to have some allocation to each region, although we will vary the allocation based on perceived risk/reward.

Currently, we are overweight ex-U.S. markets versus the U.S. market, and overweight global small-cap versus large-cap.

We primarily invest in single- and multifactor ETFs. We believe multifactor ETFs make more sense when the ETF covers multiple regions, so we tend to look at multifactor ETFs for ex-U.S. developed and emerging markets rather than the U.S.

Our global equity ETF portfolio currently has allocations to the Goldman Sachs ActiveBeta International Equity ETF (GSIE) and the First Trust Emerging Markets Small Cap AlphaDex Fund (FEMS) for multifactor coverage of the ex-U.S. developed and emerging market small-cap markets, respectively.

For ex-U.S. single-factor exposures, we currently allocate to the iShares Edge MSCI Intl Value Factor ETF (IVLU) and the FlexShares International Quality Dividend Index Fund (IQDF) for more targeted value and yield exposures, respectively.

For ex-U.S. small-caps, we hold the WisdomTree International SmallCap Dividend Fund (DLS), which also has targeted exposure to yield.

Finally, we hold the FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund (TLEH), which tilts toward Fama/French value and size factors within emerging markets and is also U.S.-dollar hedged.


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