Applying Factors to Developed Market Stocks
This article was originally published on ETFTrends.com.
Ex-US developed markets equities remain an important part of the 2018 investing landscape. Investors looking to tap that theme can go beyond traditional cap-weighted funds with the Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (DEEF). DEEF can be used as a complement or alternative to traditional MSCI EAFE strategies.
DEEF follows the FTSE Developed ex US Comprehensive Factor Index. That benchmark “is designed to provide exposure to developed international equities based on five factors – Quality, Value, Momentum, Low Volatility and Size,” according to Deutsche Asset Management.
While the quality and value factors often appear together across various stocks and ETFs, that should not be interpreted to mean that all quality stocks and ETFs are discounted relative to the broader market. During periods of elevated market volatility, the quality factor has historically posted better returns relative to other investment factors.
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations.
DEEF holds 1,142 stocks and allocates nearly 45% of its geographic weight to Europe. The European economy is steadily improving, supported by a wide range of indicators, which may lead to above average growth for the remainder of the year and into the next. Eurozone growth has accelerated, with growth and business indicators showing positive results.
Even with the recent rally in European equities, valuations still look attractive relative to domestic stocks. On a forward earnings basis, European stocks have gotten cheaper continually since 2015, and price-to-book value for the region shows European names trading at a multi-year discount to the U.S.
Additionally, DEEF devotes over 29% of its weight to Japan, one of the most undervalued major developed markets.
At the sector level, DEEF is highly cyclical as the ETF allocates about 63% of its combined weight to industrial, consumer discretionary, materials and financial services stocks. DEEF jumped 4% last week.
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