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A Different Developed Markets Tilt


There are countless exchange traded fund avenues for investors looking for diversified, ex-U.S. developed market exposure with the dominant names including the iShares MSCI EAFE ETF (EFA) and the Vanguard FTSE Developed Markets ETF (VEA).

Investors looking for something beyond the standard market cap-weighted approach have plenty of choices as well thanks to the smart beta boom. Last year, smart beta ETFs attracted $65.1 billion in new assets, nearly double the $34.2 billion hauled in by the group in 2012. [A Record Year of ETF Inflows]

The FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (TLTD) stands as a worthy alternative to the typical EAFE-based ETF and an unheralded one at that. TLTD debuted in September 2012 and somewhat quietly has amassed $484.1 million in assets under management. [FlexShares Bolsters Factor Lineup]

On the surface, TLTD, which carries an annual expense ratio of 0.42% looks like a standard EAFE ETF due to its noticeable allocations to Japan and Australia, among other developed markets. However, TLTD does feature a legitimate “tilt” and it is toward “smaller-cap and value stocks using a multi-factor modeling approach that attempts to enhance portfolio risk/return characteristics,” according to FlexShares.

Although Japan, Canada and Australia combine for 35% of TLTD’s weight, the ETF is also a credible way for investors to gain exposure to developed Europe. Comparatively speaking, developed Europe is not such a bad place to be these, especially if the thesis that the equity market recovery there is still lagging the U.S. [Italy ETF Looks Strong]

The U.K., France, Germany, Switzerland, Sweden, Spain and the Netherlands combine for 52% of TLTD’s weight. Only one stock, Nestle, commands a weight of more than 1% in the fund.

TLTD’s underlying index, the Morningstar Developed Markets ex-US Factor Tilt Index, has outperformed the MSCI World ex-USA IMI Index by 130 basis since inception in September 2012.

FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EFA.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.