A Long-Term Bet For International Equity Investors

This year is shaping to be another one of U.S. equity out-performance. With five months left in 2019, the MSCI World ex USA Index is up 12.3%, badly trailing the S&P 500's 2019 gain of 21.4%. That serves a reminder for investors wanting to bet on international equities, those bets are likely to be of the long-term variety.

What Happened

For patient investors willing to make those wagers, the Goldman Sachs ActiveBeta International Equity ETF GSIE is an exchange traded fund that makes a lot of sense. The $1.49 billion GSIE is nearly four years old and is a smart beta alternative to the cap-weighted MSCI World ex USA Index and related benchmarks.

Year to date, GSIE is performing mostly inline with the rival index, which is arguably a disappointment when a considering its multi-factor approach emphasizing highly profitable companies as well as the low volatility, momentum and value factors.

“The portfolio is divided into four equally weighted sleeves that each tilt toward stocks with a different characteristic of interest,” according to a Morningstar research note. “This simple approach is transparent, though a more integrated approach would probably lead to stronger style tilts. Each sleeve gives over- or underweightings to stocks from the selection universe based on how attractive they look on the factor it targets.”

Why It's Important

GSIE holds 816 stocks and while the fund is passively managed, it takes an active approach to factor management. For example, some investment factors that can introduce tracking error or other sampling issues, can have reduced weights within GSIE.

The ETF doesn't actively manage regional weights as ex-UK Europe, Japan and the U.K. combine for 83% of the fund's geographic exposure. Individual stock risk is mitigate by the fund taking a diverse approach that has its top 10 holdings combining for just 8.3% of its weight.

“This strategy is off to a good start,” said Morningstar. “From its inception in November 2015 through May 2019, the fund beat the MSCI World ex USA Index by 75 basis points annually, partially thanks to more-favorable stock exposure in the financial-services and healthcare sectors.”

GSIE allocates about a third of its weight to financial services and consumer staples names and its valuations are mostly inline with those of the competing MSCI index.

What's Next

GSIE's multi-factor approach and lower fees (0.25% per year) are potentially compelling for investors looking to move out of a higher-cost international equity mutual fund and for those willing to wager on factor out-performance over standard cap weighting.

“Combining the four factor strategies into a single portfolio helps mitigate turnover, as adjustments across the four sleeves partially offset one another,” said Morningstar. “To further reduce turnover, each sleeve applies a buffer around the target active weightings for each security, so that the fund doesn't trade until the style characteristics materially change. As a result, turnover was only 16% in fiscal 2018, which is low for a strategy that incorporates momentum.”

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