IVLU for international value exposure [iShares Edge MSCI Intl Value]

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
grabiner
Advisory Board
Posts: 20871
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

IVLU for international value exposure [iShares Edge MSCI Intl Value]

Post by grabiner » Fri Aug 18, 2017 8:00 pm

I overweight value and small-cap, but I have posted several times that I don't overweight value internationally, because the options are too expensive. But I am now looking at IVLU, iShares Edge MSCI International Value. While it is a factor-focused fund, it is less expensive than the conventional value option EFV, and it has better value exposure. It is also extremely tax-efficient, despite being a value index, it has about the same dividend yield as a blend index.

(All data from iShares)
Blend index IEFA: 0.08% expenses, 2.48% SEC yield, 17.89 P/E, 1.68 P/B.
Value index EFV: 0.40% expenses, 3.06% SEC yield, 14.96 P/E, 1.23 P/B.
Factor index IVLU: 0.30% expenses, 2.32% SEC yield, 13.81 P/E, 1.03 P/B.

Last year, IVLU had 95% qualified dividends, and foreign tax credit of 10% of the dividend. This would give it a net federal tax cost of only 6% of the dividend yield in a moderate tax bracket, and 11% (15% with NII tax added) even in the top bracket. With a 2.32% SEC yield, that is a tax cost of 0.14% in a moderate bracket. Thus, if you have a taxable account, and you want to hold IVLU (or IEFA for that matter), you should hold it there.

The 0.22% expense difference (0.23% versus Vanguard's similar VEA which also has small-caps) seems reasonable to pay for this much value exposure; compared to EFV, you get one and a half times the exposure for 2/3 of the cost.
David Grabiner

stlutz
Posts: 4015
Joined: Fri Jan 02, 2009 1:08 am

Re: IVLU for international value exposure

Post by stlutz » Fri Aug 18, 2017 10:07 pm

... and it's cheaper than Vanguard's actively managed option.

(Still too pricey for me since I've adopted a .2% ceiling for any fund I hold. :happy )

lack_ey
Posts: 5713
Joined: Wed Nov 19, 2014 11:55 pm

Re: IVLU for international value exposure

Post by lack_ey » Fri Aug 18, 2017 11:14 pm

Good call on IVLU but it is still a smaller fund unfortunately, though at around $100M AUM it's viable.

FNDF (Schwab Fundamental International Large Co. Index ETF) is a little cheaper yet at 0.25% with much higher AUM and trading than IVLU but uses different value criteria for weighting* and is broader, owning the large-to-kinda-mid market, so the exposure is significantly diluted.

*sales, cash flow, and dividends plus buybacks

Morningstar data for reference, so price/prospective earnings and other figures
Image

lazyday
Posts: 3012
Joined: Wed Mar 14, 2007 10:27 pm

Re: IVLU for international value exposure

Post by lazyday » Fri Aug 18, 2017 11:28 pm

For those who want a multifactor fund, also check out ISCF, iShares Edge MSCI Multifactor Intl Small-Cap. Small, value, momentum, quality. Also has .3% ER.

Very thin trading and few shares outstanding, so might only be appropriate if you hold foreign stocks in an IRA. I haven't invested yet myself, but it's my top contender among Intl Small funds with value or other factor exposure.

User avatar
in_reality
Posts: 4281
Joined: Fri Jul 12, 2013 6:13 am

Re: IVLU for international value exposure

Post by in_reality » Sat Aug 19, 2017 12:18 am

lack_ey wrote:
Fri Aug 18, 2017 11:14 pm
FNDF (Schwab Fundamental International Large Co. Index ETF) is a little cheaper yet at 0.25% with much higher AUM and trading than IVLU but uses different value criteria for weighting* and is broader, owning the large-to-kinda-mid market, so the exposure is significantly diluted.
I disagree with the "significantly diluted" analysis.

Over the lifetime of IVLU, FNDF has has a better CAGR (compound annual growth rate). What explains that?

Compared to IEFA, FNDF has more value, less size, and about the same momentum and alpha.
Compared to IVLU, FNDF has less value, more size, more momentum and less negative alpha.

So yes, FNDF's methodology will include more funds on the growth half but I think it targets retained earnings more than P/B does. I don't believe contributed capital which will boost book value is indicative of future performance. I mean isn't that why firms such as DFA introduced screens...

Anyway, at a minimum we have to consider momentum when looking at value exposure. FNDF is (often) more neutral so less of a drag on returns that way. And then with the way factors are measured, anything unexplained gets put into alpha.

The timeline is too short both for returns and factor exposure to conclude anything, but I don't agree with the notion that FNDF has "diluted" exposure. For instance, when oil crashed and cap weighted funds had a lower percent in energy, fundamental indexes were increasing their allocation. Is that really a "diluted" exposure to value? Same thing after financial stocks crashed. It's a different methodology for sure, but the same mechanism that caused increased exposure to energy after it had crashed also directs the fund to hold more companies on the growth side (again because the five year record of sales, cash flow, and dividends plus buybacks relative to price are favorable).

Anyway, there is research showing how retained earnings (at doesn't include contributed capital) have predictive power for seven years. Contributed capital which boosts book value doesn't. So yeah FNDF has diluted exposure by P/B measures but I'm not sure that's the story I am interested in.

For size exposure, FNDC is better.

lack_ey
Posts: 5713
Joined: Wed Nov 19, 2014 11:55 pm

Re: IVLU for international value exposure

Post by lack_ey » Sat Aug 19, 2017 12:45 am

in_reality wrote:
Sat Aug 19, 2017 12:18 am
lack_ey wrote:
Fri Aug 18, 2017 11:14 pm
FNDF (Schwab Fundamental International Large Co. Index ETF) is a little cheaper yet at 0.25% with much higher AUM and trading than IVLU but uses different value criteria for weighting* and is broader, owning the large-to-kinda-mid market, so the exposure is significantly diluted.
I disagree with the "significantly diluted" analysis.

Over the lifetime of IVLU, FNDF has has a better CAGR (compound annual growth rate). What explains that?

Compared to IEFA, FNDF has more value, less size, and about the same momentum and alpha.
Compared to IVLU, FNDF has less value, more size, more momentum and less negative alpha.

So yes, FNDF's methodology will include more funds on the growth half but I think it targets retained earnings more than P/B does. I don't believe contributed capital which will boost book value is indicative of future performance. I mean isn't that why firms such as DFA introduced screens...

Anyway, at a minimum we have to consider momentum when looking at value exposure. FNDF is (often) more neutral so less of a drag on returns that way. And then with the way factors are measured, anything unexplained gets put into alpha.

The timeline is too short both for returns and factor exposure to conclude anything, but I don't agree with the notion that FNDF has "diluted" exposure. For instance, when oil crashed and cap weighted funds had a lower percent in energy, fundamental indexes were increasing their allocation. Is that really a "diluted" exposure to value? Same thing after financial stocks crashed. It's a different methodology for sure, but the same mechanism that caused increased exposure to energy after it had crashed also directs the fund to hold more companies on the growth side (again because the five year record of sales, cash flow, and dividends plus buybacks relative to price are favorable).

Anyway, there is research showing how retained earnings (at doesn't include contributed capital) have predictive power for seven years. Contributed capital which boosts book value doesn't. So yeah FNDF has diluted exposure by P/B measures but I'm not sure that's the story I am interested in.

For size exposure, FNDC is better.
As you explained yourself, the value exposure is diluted by owning the growth companies, just at lower weights. They could take the same metrics/screens and create a more value-tilted portfolio if they wanted, but they don't.

Personally I like the list of value metrics/screens in the fundamental methodology a little better than the more traditional set used by IVLU. Previously I was making no comment about the relative merits and then about the rebalancing and other methodolgical differences with respect to averaging measures and all the other aspects.

Alpha in these low-single-digits-years evaluations is highly insignificant statistically. Just not enough data. All of the factor estimates are not going to be good, and actually if you look at US funds you see the fundamental index having had lower (more negative) momentum loading than regular market-cap-weighted value funds. Though better than that would be to check the older index data series with the backtested results, which I haven't looked at in a while.

smesman
Posts: 62
Joined: Thu Apr 27, 2017 7:11 am

Re: IVLU for international value exposure

Post by smesman » Sat Aug 19, 2017 2:16 am

I've considered IVLU before but what I found strange is that it is heavily exposed to Japan (41% IVLU vs 23% EFV). On the other hand, EFV is heavily exposed to the Financials sector (35% EFV vs 23% IVLU). In comparison, FNDF however has 22% japan and 20% financials so it seems better diversified.

Chip
Posts: 1555
Joined: Wed Feb 21, 2007 4:57 am

Re: IVLU for international value exposure

Post by Chip » Sat Aug 19, 2017 8:28 am

Thanks for the information. I currently own FNDF, but IVLU looks like a good TLH option.

FNDF SEC yield is currently 2.66%.

Last year FNDF yielded 2.80%, 99% QDI, and FTC of 8.9% of the dividend. Details in this post.

User avatar
Doc
Posts: 7615
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: IVLU for international value exposure

Post by Doc » Sat Aug 19, 2017 11:41 am

grabiner wrote:
Fri Aug 18, 2017 8:00 pm
I overweight value and small-cap, but I have posted several times that I don't overweight value internationally, because the options are too expensive.
I severely underweight Foreign Large Blend on the basis that it is filled with international firms that are all competing in the same market as their US counterparts so you get little diversification.

I like the Schwab small cap in both index flavors because of the low cost and no EM.

But way back when when I couldn't find a low cost small and/or value foreign I went for an active fund with a 1.2% ER ... gasp.

Ten year category ranking 1st. The three year is all the way down to 12th. My investor returns for the 7 years I have owned it 12.9%.

I won't bother to tell you all what it is because I don't want the ridicule I'll get. Besides it's closed to new investors and all of you would be more comfortable with the Schwab ETFs anyway.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

User avatar
grabiner
Advisory Board
Posts: 20871
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: IVLU for international value exposure

Post by grabiner » Sat Aug 19, 2017 2:19 pm

Doc wrote:
Sat Aug 19, 2017 11:41 am
grabiner wrote:
Fri Aug 18, 2017 8:00 pm
I overweight value and small-cap, but I have posted several times that I don't overweight value internationally, because the options are too expensive.
I severely underweight Foreign Large Blend on the basis that it is filled with international firms that are all competing in the same market as their US counterparts so you get little diversification.
The diversification may not be that great, but the cost of that diversification is very low, so you might as well take it. Comparing the all-cap indexes, Total Stock Market Index costs 0.04%, and Developed Markets Index costs 0.07%. (There is a small additional loss because Developed Markets Index has 80% qualified dividends; it had 100% when I bought it as Tax-Managed International, and I can't switch to IEFA with 95% qualified now because I have large capital gains.)

But that diversification difference is the reason that I held GWX (SPDR International Small-Cap) and International Explorer before Vanguard offered its own ETF; international small-cap should be less correlated with a US-heavy portfolio, and thus I was willing to pay extra for it. Even now, I am paying extra; VSS (Vanguard International Small-Cap ETF) has 0.13% expenses, but its dividends are only 50% qualified.

(Note that in these comparisons, the foreign tax credit is ignored, because it is part of the cost. If a foreign country taxes a dividend at 10%, and then the US taxes it at 15% and you get 10% back from the IRS as a credit, you have lost 15% of the dividend, just as if you had a US stock with no foreign tax. The foreign tax credit is important in the decision of what to hold in a tax-deferred versus taxable account; the US stock would be free in an IRA, while the foreign stock loses 10% of its dividend.)
David Grabiner

azanon
Posts: 1519
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR
Contact:

Re: IVLU for international value exposure

Post by azanon » Sat Aug 19, 2017 2:46 pm

smesman wrote:
Sat Aug 19, 2017 2:16 am
I've considered IVLU before but what I found strange is that it is heavily exposed to Japan (41% IVLU vs 23% EFV). On the other hand, EFV is heavily exposed to the Financials sector (35% EFV vs 23% IVLU). In comparison, FNDF however has 22% japan and 20% financials so it seems better diversified.
That would be the dealbreaker for me. I'm trying to escape US's high CAPE value, and Japan isn't that far behind with a CAPE of 26. The better value is in Europe.

Theoretical
Posts: 1073
Joined: Tue Aug 19, 2014 10:09 pm

Re: IVLU for international value exposure [iShares Edge MSCI Intl Value]

Post by Theoretical » Sun Aug 20, 2017 5:56 pm

Japan though is a bit different in that the Value-Growth difference is so stark in returns that it's almost like two different markets. There's also the issue of a value spread between the companies with absurd growthy ratios and moderate value ones. On the other hand IVLU tilts VERY large, which is no help for Japanese equities.

lazyday
Posts: 3012
Joined: Wed Mar 14, 2007 10:27 pm

Re: IVLU for international value exposure [iShares Edge MSCI Intl Value]

Post by lazyday » Tue Aug 29, 2017 12:44 pm

Seems the index is essentially sector neutral.

Still able to get decent value by weighting on value*marketcap instead of just marketcap, and by only selecting the cheapest stocks. Both are subjected to buffers to reduce trading.


https://www.msci.com/eqb/methodology/me ... ay2015.pdf
2.2.2 CALCULATING THE SECTOR RELATIVE VALUE Z-SCORE
....
A sector relative score is then derived from the composite value z-score. It is arrived at by
standardizing the composite value z-score within each sector. A sector relative score is
winsorized at +/- 3.
Don't know what "standardizing" means, but here's MSCI index data from JUL 31, 2017 for MSCI WORLD EX USA ENHANCED VALUE INDEX:
Financials 23.07% Industrials 14.04% Consumer Discretionary 11.41%
Consumer Staples 10.15% Health Care 9.65% Materials 8.69% Energy 6.24%
Information Technology 5.88% Telecommunication Services 4.11% Real Estate 3.42%
Utilities 3.35%
Almost the same as MSCI WORLD EX USA INDEX (USD):
Financials 23.68% Industrials 13.73% Consumer Discretionary 11.37%
Consumer Staples 10.81% Health Care 9.52% Materials 7.95% Energy 6.33%
Information Technology 5.85% Telecommunication Services 4.12% Real Estate 3.36%
Utilities 3.27%
It seems that with MSCI, "World" means "Developed world". "All country world" includes EM.

Post Reply