Credit: Shutterstock photoETF providers are continually turning to smart beta indexes that seek to capture a unique subset of stocks with specific fundamental or technical qualities. While these funds often have higher relative fees than their passive counterparts, they also offer several characteristics that may be attractive for investors seeking a specific theme that aligns with their portfolio goals.
International markets offer a wide range of strategies that target individual countries, sectors, regions, and even currency exposure. The following ETFs attempt to outperform their peers by blending those characteristics with enhanced index screening criteria.
WisdomTree Europe Small Cap Dividend Fund (DFE)
DFE is the largest exchange-traded fund dedicated to small cap stocks in Europe with over $1 billion in total assets. This ETF maintains exposure to over 350 quality companies that have historically paid dividends to shareholders. It then fundamentally weights the holdings according to annual cash dividends paid.
The end result is a diversified and distinctive portfolio of overseas stocks of which the majority are under $2 billion in total market capitalization. DFE has a current 30-day SEC yield of 2.78% and dividends are paid quarterly to shareholders. The top three countries represented in DFE include: United Kingdom, Sweden, and Germany.
So far this year, DFE has jumped 10.59% and is currently one of the top performing diversified international ETFs in 2015. This fund has managed to sidestep the heightened volatility that has plagued regions such as Asia and Latin America.
A fund of this nature may be appropriate for investors seeking an overseas equity income position or international small cap exposure with a regional focus. DFE charges an expense ratio of 0.58%.
PowerShares International BuyBack Achievers Portfolio (IPKW)
IPKW is focused on a narrow portfolio of 50 international stocks that have had a net reduction in their outstanding share float of at least 5% over the last fiscal year. This ETF is based on the Nasdaq International BuyBack Achievers Index.
Companies with a focus on share buybacks are often in a mature and stable phase of their business cycle. As a result, they are able to use free cash flow to narrow the field of available equity as an incentive to existing shareholders.
The top country allocations in IPKW are Japan, Canada, and the United Kingdom. The concentrated nature of this index allows for a far different underlying makeup than a more traditionally diversified international fund. Nevertheless, IPKW has been able to outperform the bulk of its peers this year and is currently sitting on a 2015 gain of 4.40%.
This ETF may be appropriate for investors seeking to screen for companies implementing share buyback plans or as a tactical international play with the potential for returns in excess of a broad-based benchmark. IPKW carries a net expense ratio of 0.55% and has $54 million in total assets.
iShares MSCI EAFE Minimum Volatility ETF (EFAV)
ETF investors looking for a conservative overseas solution may be drawn to EFAV, which selects 200 of the lowest volatility stocks in the MSCI EAFE Index. The goal of this ETF is to maintain correlation with both developed and emerging market countries, while reducing peaks and valleys associated with stock volatility.
EFAV has managed to gain 3.43% so far this year, while the benchmark iShares MSCI EAFE Index (EFA) is down -1.44%. That positive divergence in EFAV has been driven by an emphasis on financial, health care, and consumer staples companies which have held up well in 2015.
One of the advantages of this ETF is its ultra-low expense ratio of just 0.20%. This reduced cost may give EFAV an advantage as a potential core international holding for investors that are concerned about draw down in their portfolio.
The Bottom Line
Smart beta indexes are continuing to develop their own merits within the ETF universe. However, it’s important to understand their makeup and what drives changes to the underlying holdings over time in order to successfully implement them in your own portfolio.
Diversified investors will likely want to maintain an allocation to international markets despite the current woes that have plagued many overseas countries. In my opinion, ETFs offer one of the most liquid, low-cost, transparent, and flexible means of implementing this theme in a diversified strategy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
