This article was originally published on ETFTrends.com.
International equities have been lagging behind the U.S. markets for years but are finally having their moment in the sun as investors look beyond the pricey valuations in the domestic U.S. stocks and consider cheaper opportunities in both developed and emerging markets. However, foreign market exposure comes with its own set of idiosyncratic risks that financial advisors need to be prepped for.
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On March 14, 2018, ETF Trends will be hosting its annual Virtual Summit, an online virtual conference environment where financial advisors can learn about current ETF issues, hear from industry experts and connect with peers without the burden of cost and traveling.
On a panel titled, Understanding Modern Day Risks and Opportunities with International Markets, Rob Bush, Director and ETF Strategist for Deutsche Asset Management, Josh Rogers, Vice President and Beta Specialist for J.P. Morgan Asset Management, and Danton Goei, Portfolio Manager for Davis Advisors, will touch upon global investment opportunities and methods to limit risks when branching out into the international markets.
For instance, when gaining exposure to international equities, investors will be exposed to foreign exchange currency fluctuations. Nevertheless, there are currency-hedged equity ETF options, like the Xtrackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), that help limit currency risks when investing in foreign markets.
As the U.S. dollar strengthens, foreign currencies would depreciate. If an investor holds a foreign stock that is denominated in the local currencies, a weaker foreign currency would translate to a lower USD-denominated return on that foreign equity exposure. DBEF provides exposure to equity securities in developed international stock markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and non-U.S. currencies.
Investors can also look to smart beta strategies that incorporate fundamental factors in their indexing methodologies to limit the potential risks of a traditional market cap-weighted fund. The JPMorgan Diversified Return International Equity ETF (NYSEArca: JPIN) is a multi-factor ETF that provides advisors and investors direct access to hedge fund exposure inside an ETF vehicle. The underlying indices diversify risks that are less likely to be rewarded while overweighting areas that are more likely to produce positive results.
The underlying customized FTSE Russell indexing methodology selects components based on a diversified set of factor characteristics, such as relative valuation, price momentum and quality. The enhanced indexing process would allow the ETFs to exclude expensive, low quality companies with poor momentum, which could help the ETFs diminish drawdowns without sacrificing too much from any potential upside of a market recovery.
Additionally, investors may also look to a time-tested active approach to potentially enhance returns. Davis Advisors recently rolled out the actively managed Davis Select International ETF (NasdaqGM: DINT) after its successful launch of the Davis Select Worldwide ETF (NasdaqGM: DWLD). The newer Davis Select International ETF seeks to generate long-term growth of capital by investing in common stocks issued by foreign developed and emerging market companies, whereas DWLD covers world markets, including the U.S.
Davis Advisors focuses on long-term opportunities that incorporate the money manager’s judgement experience, high conviction, low turnover, accountability and alignment. The Davis team screens for fundamental characteristics, including cash flows assets and liabilities, and other criteria.
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