Inside The New Target Factor ETFs From IShares

Deflationary fear and a slowdown have started to trouble developed international markets, and most investors in the ETF world are looking out for quality exposure in the area. In fact, some aggressive investors are hunting for high momentum stocks presuming that these might outperform in the days ahead in the prevailing easy money era (read: 3 Worst Global ETF Investments of 2014).
Their search looks justified. After all, the Fed withdrew its gigantic QE program last year and might start walking the way of policy tightening later this year. Thanks to such policy differential in the developed world, iShares – the largest ETF issuer in the world – brought about two products targeting the developed international economies probably to quench investors’ thirst. We have detailed the two newly launched funds below (read: JP Morgan Launches International Equity ETF (JPIN).
iShares MSCI International Developed Momentum Factor ETF: IMTM
For a broad foreign market play with a focus on large-and-mid cap companies, investors could consider IMTM which focuses on 12 developed countries for exposure. Stocks that exhibit a higher price momentum will be included in the fund. This product follows the MSCI World ex USA Momentum Index, holding 269 securities in its basket and charging a pretty low fee of 30 basis points a year for this relatively unique exposure.

Though the fund holds about 28% exposure in the defensive health care sector, it is more inclined toward higher beta sectors like financials, industrials companies and consumer discretionary. Top nations include Japan (29.6%), Canada (18.0%), and Switzerland (12.9%) while the UK (8.8%) and Germany (4.7%) round out the top five for this well-diversified fund.
The fund does not have much company concentration risk with no stock accounting for more than 5.34%of the fund. Novartis, Roche and Bayer are the top-three holdings of the fund (see all the Broad Developed World ETFs here).

IMTM Competition: Momentum strategy is not yet popular in the ETF world. Though the domestic economy has a couple of ETFs including the $1.46 billion-First Trust Dorsey Wright Focus 5 ETF (FV - ETF report), $1.61 billion-PowerShares DWA Momentum Portfolio (PDP - ETF report) and $515 million-iShares MSCI USA Momentum Factor ETF (MTUM - ETF report), the international arena is relatively less penetrated.

Global Momentum ETF (GMOM - ETF report) made an entry late last year  in the international space and has amassed about $26 million in assets so far. Given GMOM’s high expense ratio of 94 bps and iShares’ own product MTUM’s considerable success in a short span, we expect the issuer to replicate the success on its global version as well. However, the issuer should take note of Cambria’s active approach to the momentum theme which might give it an edge over IMTM in volatile markets (read: Inside the New Global Momentum ETF from Cambria).

iShares MSCI International Developed Quality Factor ETF: IQLT

This fund gives investors exposure to quality stocks (excluding U.S.) by identifying companies that have the highest quality scores based on three main fundamental variables – high return on equity, stable earnings year-over-year growth and low financial leverage.
The product charges investors 30 basis points a year in fees and tracks the MSCI World ex USA Sector Neutral Quality Index. The fund holds about 289 securities in its basket with a focus on financials (26.9%). Industrials (12.1%), Consumer Discretionary (11.5%), Health Care (10.8%) and Consumer Staples (10.6%) occupy the next four spots.
The fund is heavy on the UK with about one-fourth of the exposure followed by Switzerland (15.6%). Roche (RHHBY) takes the top-most allocation in the portfolio with about 5.2% exposure followed by Novo Nordisk NVO (2.7%) and Nestle (NESN-VX) (2.31%).

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