Inside iShares’ 2 Factor-Based International ETFs
Rolling out a global version of a successful domestic fund is the latest trend. Many issuers first launched a unique-themed product on the U.S. economy, and then witnessing its growing acceptance and sensing the need of the hour, brought out its international edition. iShares, one of the most sought after ETF sponsors in the world, also follows this strategy. Back in 2013, the issuer had launched the iShares MSCI USA Size Factor ETF (NYSEARCA: SIZE ) and the iShares MSCI USA Value Factor ETF (NYSEARCA: VLUE ) in the backdrop of the U.S. market. While SIZE has generated over $236 million in assets, VLUE has garnered even more, with $712.5 million so far. Now, the sponsor has initiated two ETFs with the same investing theme as that of SIZE and VLUE on the international environment. Let’s take a look at the two ETFs in detail: The newly launched ETF looks to track the performance of the MSCI World ex USA Risk Weighted Index. The fund currently holds 842 stocks with a lower risk outlook from the 17 developed markets. Though the fund takes large- and mid-capitalization stocks into account, stocks with comparatively lower market capitalization also get preference. With the surge of policy easing in the developed economies, international investing has become extremely popular this year. This was fueled up by the QE launch by the ECB and rock-bottom interest rate levels in the eurozone. The Japanese market also maintained the winning momentum on a stepped-up stimulus measure. However, one should note that relatively small-cap stocks better reflect the strength of an economy than larger ones. Large-cap stocks normally have a higher international presence and are affected by global events. On the other hand, small-cap stocks are highly volatile. Thus, a portfolio with smaller-cap stocks but lower realized volatility, like ISZE, can be an intriguing bet on the developed economy right now. The fund has a tilt toward Japan (19.73%), Canada (13.13%) and the U.K. (11.81%). Each of the other countries has less than 9.27% allocation. Sector-wise, Financials dominates the fund with 27% allocation, while Industrials (18.23%), Consumer Discretionary (13.02%) and Consumer Staples (9.94%) occupy the next three spots. The fund is low on Telecom (4.57%) and Information Technology (3.90%). It has very low company-specific concentration risk, with no single stock occupying more than 0.45% of the total. The fund charges 30 basis points as fees. Competition: The newly launched product is likely to face competition from quite a number of funds prevalent in the global equities space. Among them, ETFs with low risk exposure, including the PowerShares S&P International Developed Low Volatility Portfolio ETF (NYSEARCA: IDLV ), deserve a mention. Overall, the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index ETF (NYSEARCA: TLTD ) and the PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio ETF (NYSEARCA: PXF ) can be considered as potential competitors. iShares MSCI International Developed Factor ETF (NYSEARCA: IVLU ) in Focus This ETF looks to focus on value in the broad developed economic stock market, tracking the MSCI World ex-USA Enhanced Value Index for its exposure. The fund holds 265 stocks in its basket and charges investors 30 basis points a year in fees. IVLU will focus on large- and mid-cap stocks and reweight firms based on several valuation metrics. These include price-to-book value, price-to-forward earnings and enterprise value-to-cash flow from operations. Though the developed economies have hemmed the investing theme so far in 2015, the path is not free of odds. Occasional threats including the nagging “Grexit” worries, the possibility of the Fed rate hike sometime later in 2015 and the consequent strength in the greenback, plus overvaluation concerns which keep bothering these markets. Thus, a keen attention on the value factor is warranted for edgy investors, and IVLU could do justice to them. In terms of exposure, the basket results in a big chunk of assets going to Financials (26.64%), followed by Industrials (12.52%) and Consumer Discretionary (12.08%). Healthcare (11%) and Consumer Staples (10.47%) take the next two spots. The fund is heavy on Japan (39.04%) followed by the U.K. (15.69%) and France (12.75%). Its holdings are a bit concentrated as compared to ISZE, as Sanofi (NYSE: SNY ) (4.46%), Toyota Motor (NYSE: TM ) (2.97%) and Teva Pharma (NYSE: TEVA ) (2.80%) combine to take up roughly 10.23% of the assets. Competition: The list of competitors is moderately crowded, as there are dozens of funds that focus on value for their exposure. The Schwab Fundamental International Large Company Index ETF (NYSEARCA: FNDF ), the FlexShares International Quality Dividend Dynamic Index ETF (NYSEARCA: IQDY ) and the ValueShares International Quantitative Value ETF (BATS: IVAL ) are some of the ETFs which could pose as threats to this newbie. Original Post