Factors Go International

by: , Chief Investment Officer and Managing Director | IndexIQ

Factor-based investing has demonstrated its ability to create new opportunities for U.S. investors by identifying and over-weighting certain elements in the stock selection process for the indexes underlying exchange-traded funds (ETFs). These elements have included everything from dividends and “quality” to value and momentum.

Many of these factors are now starting to head abroad, and are turning up in the construction process for global and international ETFs. Do they travel well? Of course it depends on the factor, but as a general matter we think yes. In fact, in some instances international markets may be less efficient than those in the U.S., creating a dislocation in prices that can be exploited more efficiently by a factor-based approach.

In one such case, we’re applying these ideas to the index underlying the IQ 500 International ETF (IQIN), which uses a rules-based methodology incorporating three fundamental factors: sales, market share, and operating margin.

Based on this selection criteria, we then identify and include the top 500 large cap international companies in the index, based on their composite rank. The fund is diversified by country and sector and is meant to serve as a core international holding.

Of course there are now hundreds of factor-based ETFs out there, using all kinds of rules to build portfolios. So why focus on these three factors? First, we wanted to find something other than market capitalization to define “size.” Big is fine, but it doesn’t tell you much about a company’s profitability or growth prospects. A lot of big companies are just treading water. Sales growth (measured annually), on the other hand, suggests a company that’s succeeding in the marketplace or at least participating in a market that’s seeing an increase in demand. Market share (also measured annually) is a more relative concept; a company with growing share is generally performing well compared to its peers. Finally, operating margin (measured over three years) goes to the company’s ability to grow and take market share while remaining profitable.

By combining these factors in the index underlying IQIN we believe we’re able to identify companies that, collectively, will outperform a similar group of 500 international equities ranked by more traditional measures like market capitalization. Because these companies are spread across multiple industries and sectors it can get a little complicated. There are, in some cases, different regulatory requirements and countries that are at various stages of the economic cycle, but this can generally be accounted for in the construction of the index.

More broadly, we think most investors should have some exposure to international markets. Using a multi-factor tilt to identify and invest in a diversified portfolio of non-U.S. companies that are growing faster, taking market share, and generating cash flow is a good way to start.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The IQ 500 International Index selects and weights securities utilizing a rules-based methodology incorporating three fundamental factors: sales, market share, and operating margin. The top 500 international securities, based on their composite rank, are included in the index.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value. An investment cannot be made in an index.

About Risk:

Before considering an investment in the Fund, you should understand that you could lose money.

The performance of the underlying Index and the Fund may deviate from that of the sector the underlying Index seeks to track due to changes that are reflected in the sector more quickly than the annual rebalancing process can track. Securities in the underlying Index or the Fund’s portfolio may also underperform in comparison to the general securities markets. When the Fund invests in foreign markets, it will be subject to risk of loss not typically associated with domestic markets. Loss may result because of less foreign government regulation, less public information and less economic, political and social stability. Loss may also result from the imposition of exchange controls, confiscations and other governmental restrictions.

Investments in equity securities are particularly subject to the risk of changing economic, stock market, industry, and company conditions and the risks inherent in the portfolio managers’ ability to anticipate such changes that can adversely affect the value of the Fund’s holdings. Opportunity for greater gain often comes with greater risk of loss.

The Fund is a new fund. As a new fund, there can be no assurance that it will grow to or maintain an economically viable size, in which case it may experience greater tracking error to its underlying Index than it otherwise would at higher asset levels, or it could ultimately liquidate.

Consider the Fund’s investment objectives, risks, and charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Fund and are available by visiting nylinvestments.com/etfs or calling 888-474-7725. Read the prospectus carefully before investing.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, located at 51 Madison Avenue, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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