Advisors and experienced investors know that when it comes to broad gauges of ex-US developed market stocks, the MSCI EAFE Index is one of the bellwethers. With that enviable status in mind, it’s not surprising the index serves as foundation for a slew of index funds and exchange traded funds (ETFs), which combine for hundreds of billions of dollars in assets under management.
There’s nothing wrong with the MSCI EAFE Index and the pure beta funds tracking, but at a time that appears to be the early stages of international equity renaissance, it wouldn’t hurt to refresh the developed markets investing proposition. The newly minted VanEck MSCI EAFE Analyst Sentiment ETF (VEFA) accomplishes that objective.
VanEck’s latest international equity ETF follows the MSCI EAFE Analyst Sentiment Select Index. Put simply, that offshoot of the parent gauge uses rules-based screening to assign larger weights to components that generating bullish buzz/positive ratings among sell-side analysts. Let’s take a look at how VEFA can complement or replace traditional international exposures in client portoflios.
VEFA Could Set Itself Apart
Some market participants always have trepidation as it relates to new ETFs and while there’s no predicting VEFA’s long-term success, it is clear that the rookie ETF is unique and potentially useful to advisors and clients.
Add to that, the new ETF’s strategy isn’t overly exotic or difficult to comprehend. One caveat is that VEFA holds 100 stocks while a traditional MSCI EAFE Index-tracking fund is typically home to 800 or so holdings.
“The analyst sentiment signal equally weights five analyst sentiment revision categories: earnings per share, sales, cash flow, price targets and buy/sell recommendations,” according to VanEck. “Stocks are scored based on standardizing analyst sentiment indicators derived from revisions from those five categories. The index optimization process selects 100 stocks, subject to sector, country and individual security constraints which aim to limit ex-ante tracking error to 4% versus the MSCI EAFE Index. The index rebalances quarterly in line with MSCI’s standard review calendar.”
Of course it bears noting that sell-side analysts don’t bat .1000, but the ones that are highly rated and some from the biggest banks do issue calls that move stocks. Keeping up with that is an impossible (and expensive) task for ordinary investors. VEFA does the heavy lifting.
VEFA Is Different
Obviously, investors should expect differences between VEFA and its old guard counterparts and those departures do exist. Not only is the VanEck ETF’s lineup smaller in terms of population, it’s not a carbon copy of established MSCI EAFE peers in terms of what stocks loom large. For example, ASML HOLDING NV (ASML) is VEFA’s largest component, but that’s the only one of the new ETF’s top 10 holdings that’s also a top 10 name in the MSCI EAFE Index.
There are some sector-level differences, too. The MSCI EAFE Index allocates about 55% of its weight to financial services, industrial and healthcare stocks while VEFA’s top three sector exposures are financials, industrials and consumer discretionary to the tune of 56%.
In terms of geographic exposures, VEFA devotes nearly half its weight to Japan, Australia and the U.K. while the top three countries in the parent gauge are Japan, the U.K. and France at a combined weight of almost 48%.
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