We enjoy highlighting new and innovative ETF strategies
as exchange-traded-products have exponentially expanded the universe of
available investment options in a transparent, cost effective and
tax-advantaged manner. With strong
outperformance by international equities so far in 2015, we sought a fund to
highlight offering diversification and a strategy easy to understand.
Our search brought us to the Vident International Equity
Fund (VIDI) where a unique rules-based approach creates a fund offering
international exposure beyond most market cap weighted products. Unlike the MSCI ACWI ex US Index, where the
market cap weighting results in an 85% allocation to developed markets, the
Vident International Equity Index focuses on identifying countries that have policies
to promote human capital and deliver superior long-term returns.
Consisting of 35 different countries, the index is
equally weighted before the first reweighting based on stress testing to
determine how sensitive each market is to a variety of economic shocks. Further adjustments are made based on 4 broad
headlines: growth (tax and regulatory
burden), sound money (trade barriers, financial regulation), political
stability (rule of law, corruption) and price (current market valuations to
fundamentals.) A final screen looks at
momentum and other corporate fundamentals to quintile the countries with automatic
adjustments to the overall market allocation reconstituted every January and
rebalanced in July.
Given the weighting system, it’s not surprising that its
performance has a strong emerging market flavor compared to the iShares MSCI
ACWI ex US (ACWX) fund. Since VIDI’s
inception on 10/30/2013, the fund has returned -1.35% compared to 1.05% for
ACWX and -2.33% for the iShares MSCI Emerging Markets Index ETF (EEM) and is
currently underperforming ACWX in 2015 by 1.2% (up 4.1% to ACWX’s 5.37%.) The main culprit is a greater weighting
towards Asia where the fund has nearly twice the exposure to emerging market
positions than ACWX in countries like Malaysia and India with the fund’s
largest single position is a 2.4% allocation to the iPath MSCI India ETN (INP),
up 8.56% YTD. The larger Asian
allocations come at the expense of developed European markets where the largest
underweight is the United Kingdom with the fund maintaining a small 2%
allocation (compared to ACWX’s 14.5) due to what they feel are weaker growth
prospects and already high prices.
Despite the above, VIDI has managed to grow to over $740 million by offering
investors more than just one-stop shopping for the international sleeve of
their portfolio. VIDI offers a
transparent and understandable portfolio management solution that is also cost
effective. While not considered to be an
actively managed fund by ETFG, the .75% expense ratio charged by the fund for
the annual reconstitution and rebalancing may be more palpable when compared to
the fee’s charged by active mutual fund managers in the foreign large blend or
emerging market categories where the average fee’s in 2014 were 1.23% and 1.58%
respectively. Those higher fee’s haven’t
greater performance in 2015 with the average EM fund up 2.3% and the average
FLB fund is up 5.49% excluding any front-end charges.
Thank you for reading ETF Global Perspectives!
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