The proliferation of exchange-traded funds has helped bring previously difficult-to-reach asset classes and strategies to the fingertips of individual self-directed investors and professional money managers alike. Amid the continuing wave of innovation, investors have grown more comfortable with sophisticated products that steer away from the traditional “plain vanilla” indexing approach. One such offering is the recently launched International Equity Fund (VIDI) from ETF industry newcomer Vident Financial, who took the time to give us a closer look under the hood of this new instrument [see also 101 ETF Lessons Every Financial Advisor Should Learn].
ETF Database (ETFdb): What was the inspiration behind creating the Vident International Equity Fund (VIDI)?
Vident Financial (VF): The Vident International Equity Fund was conceived to facilitate the implementation of time-tested economic and investment principles in an investing framework. Quite simply, there was no existing investment strategy that could incorporate—with precision—our investment framework. The Vident International Equity Index TM (VIE), which codifies the investment strategy, represents a fresh, rational, and common-sense approach to international equity diversification.
This investment framework recognizes that no one can predict the future with certainty, including predicting investment results. However, it is possible to assess and forecast the factors that influence those results in the context of time-tested economic principles. Application of that analytical data (including economic growth, inflation, and valuation) can then direct a strategy.
ETFdb: Can you please explain more about what Principles-Based Investing means?
VF: Vident Financial’s solutions adhere to the investment framework Principled Reasoning, which combines principles, rigorous global research, and an in-depth evaluation of selected risk dynamics. It relies on six time-tested principles to guide its investment approach, which provides a basis for investment managers to allocate capital in a consistent, clearly defined way.
- Principles are time-tested and proven concepts that transcend current circumstances.
- Reasoning is using careful judgment to properly apply principles, in an effort to help bring clients more peace of mind and an acceptable return on their investment.
Principles-based investing seeks to remove some of the subjectivity involved with investing, and instead rely on a set of core principles that are carefully applied and implemented. For more information on our Core Economic & Investment Principles, please visit the Vident Financial website.
ETFdb: The Global Equities ETFdb Category has grown to include more than 30 offerings; how does VIDI separate itself from the more established funds in the same space?
VF: There are two main differences:
1. Unique Portfolio Strategy – VIDI’s international equity strategy combines principles-based investing with sophisticated risk management strategies. It seeks to balance risk across developed and emerging economies, while also emphasizing those with favorable conditions for growth. VIDI relies on established economic principles within a systematic, rules-based investment and risk-management process.
The Vident International Equity Fund rules-based strategy seeks to do three major things. VIDI seeks to be risk-balanced, not capitalization-weighted, allowing for greater diversification and increased exposure to faster-growing, principles-adherent economies at attractive valuations. It also assesses countries based on certain economic factors, emphasizing those countries that foster conditions for future growth and that promote greater productivity of their populations. Lastly, it assigns more weight to countries that express principle adherence through responsible fiscal and monetary policy, as well as other productivity-influencing factors that have favorable risk-adjusted valuations.
Many international equity strategies are often tracked to capitalization-weighted indices. These indices can sometimes introduce the risk of country, company, and currency concentration and high exposure to slower-growing developed markets, often with deteriorating principle adherence. The VIE Index seeks to provide greater exposure to faster-growing economies that tend to be less encumbered by regulation, debt, deficits, and higher taxation. These nations also tend to have stable currencies and favorable demographics, allowing their populations and resident companies to flourish [try our Free ETF Country Exposure Tool].
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VIE’s process applies a systematic, rules-based approach to weight countries according to risk. This results in an index allocation across 35 developed and emerging market economies through 500 international equity positions.
2. Unique Corporate Structure – VIDI is also differentiated through its ownership, Vident Financial, LLC—who is owned by the Vident Investors Oversight Trust. “The Trust” is comprised of trustees who are industry professionals, and are responsible for ensuring that Vident Financial is run in accordance with the Principled Reasoning investment framework.
The Trust also ensures that the excess profits that Vident earns will be reinvested in the following two ways:
- Expanding Vident’s line of principled investment solutions
- Reducing fund operating expenses for the benefit of the investors in Vident’s investment products.
Vident Financial’s main goal is to offer principles-based solutions while increasingly reducing the costs to investors. The Trust is the sole shareholder of Vident Financial. As such, the focus of both Vident Financial and the Trust is to deliver value to the investors, putting their interests first.
ETFdb: Broadly speaking, what are some of the most compelling trends you are seeing across the globe?
VF: Advances in technology continue to shape the world’s investment landscape. Within the changing investment landscape, there are three compelling trends that we are seeing. Firstly, investors are desiring more robust risk management embedded within investment solutions. Secondly, there is a move away from debt-burdened economies with poor demographics (Japan) and toward economies with more economic potential (Brazil, Russia, India and China, or BRICs). Lastly, the investment industry is moving toward more “intelligent strategy”-type ETFs, a hybrid of “passive” and “active” strategies.
The Bottom Line
Investors have more than a handful of options when it comes to tapping into overseas markets. The recently launched International Equity Fund from Vident, VIDI, warrants a closer look under the hood from anyone who wishes to establish exposure to global equity markets, but is looking to avoid the nuances and drawbacks that are associated with traditional market capitalization-weighted indexes.
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Disclosure: No positions at time of writing.