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~ by Snehasish Chaudhuri, MBA (Finance)
iShares Core MSCI Total International Stock ETF (NASDAQ:IXUS) is an exchange-traded fund (“ETF”) that invests in public equity markets of the global ex-U.S. region. It was launched by BlackRock, Inc. (BLK), and is managed by BlackRock Fund Advisors.
Since the Covid-19 pandemic broke out three years back, it has been difficult to find opportunities in the U.S. markets. Russia’s invasion of Ukraine further complicated the scenario. Large-cap U.S. technology stocks are currently in a bear market. 2022 was especially a poor year for the overall stock market. Despite all these, IXUS delivered decent yield and double-digit annual average total returns over the long run. During last year, it generated a yield of 3.72 percent. IXUS’s low turnover ratio of 10 percent also works to its advantage.
iShares Core MSCI Total International Stock ETF Has High Growth Prospects
iShares Core MSCI Total International Stock ETF was formed on October 18, 2012 and has been consistently paying semiannual dividends since then. IXUS’s portfolio seeks to track the investments of the MSCI ACWI ex USA IMI, which is composed of large-cap, mid-cap, and small-cap non-U.S. equities. This index is a free float-adjusted market capitalization index that measures the combined equity market performance of developed and emerging markets countries, excluding the United States. The fund generally invests at least 80 percent of its assets in the component securities of its underlying index, and AXUS’s portfolio is created by using representative sampling techniques.
iShares Core MSCI Total International Stock ETF qualifies with respect to some minimum requirements according to my “7 Factor Model for Evaluating a Fund.” The fund has a current market price of $58.67, AUM of $29.97 billion, yield of little less than 4 percent coupled with a very low expense ratio of 0.07 percent and a well-diversified portfolio. International equities delivered better returns over U.S. stocks. However, returns of foreign assets suffered due to the strengthening U.S. dollar. As the U.S. dollar appreciates with respect to foreign currencies, all the assets invested in international markets become less valuable when converted back into US dollars. As a result, the higher returns earned on foreign equity stocks are being offset by an appreciating U.S. dollar.
Performance and Risks of iShares Core MSCI Total International Stock ETF
iShares Core MSCI Total International Stock ETF is a well-diversified exchange traded fund with industrial, financial, information & communication technology (ICT), and healthcare sectors accounting for almost 60 percent of its entire investments. An emphasis on innovative technologies, increasing demand for healthcare facilities, and revolutionary changes in industrial structure, these sectors are expected to generate above-average growth in the coming decade. As economic growth takes an upward shift, the financial sector will become the biggest beneficiary. Top investments of this global equity fund from these sectors also performed quite well over the long run. During the past 10 years, its yield ranged between 2 and 4 percent. During 2016 and 2021, this exchange traded fund generated an annual average total return of almost 10 percent.
More than 70 percent of IXUS’s assets are invested in ten countries. Half of them are developed markets like Japan, the United Kingdom, Canada, France, and Switzerland. All these economies have the best sovereign bond ratings. Also, despite low growth, all these economies are still growing at a consistent pace. Another half are emerging Asian economies of Australia, China, India, Taiwan, and South Korea. These five markets are having the biggest growth potential among the large economies. Although not having the best credit ratings, these countries have investment grade sovereign bonds ratings. This international ex-U.S. diversified equity fund invests in 4310 equity stocks with more than one percent of its total assets invested in only two stocks – Taiwan Semiconductor Manufacturing Company Limited (TSM) and Nestle S.A. (OTCPK:NSRGY).
Foreign markets offer a different set of challenges that goes beyond those witnessed in the U.S. equity markets. While inflation is a huge concern all over the world, global economies are far away from any type of recession or economic slowdown. Having said that, localized inflation resulting from high energy prices surely makes things difficult. Fortunately, a resolution of the Russia-Ukraine conflict will make things pretty usual. So, in the long run, investments in international equity markets will surely produce results. In the meantime, inflation will continue to be a reason to be skeptical. A broad recovery in large-cap US-based technology stocks would likely lead to continued underperformance of foreign stocks relative to U.S. stocks. If dollar continues to strengthen, the war in Ukraine escalates further and global inflation worsens, then the case for foreign stocks, already contrarian, will break down.
Investment Thesis
iShares Core MSCI Total International Stock ETF has a low-yielding portfolio that invests almost three-fifths of its assets in four sectors – ICT, healthcare, financial, and healthcare. These sectors are expected to generate quite high average growth over the long run. I find this fund to be promising according to my “7 Factor Model for Evaluating Global Funds.” In addition to current market price, AUM, yield, expense ratio, and portfolio diversification, the level of discount from its current net asset value, its portfolio risk and the sustainability of its current level of returns enables me to understand the attractiveness of a fund for its investors. The fund is currently trading at a marginal discount to its NAV. Its major investments also performed well.
U.S. stocks performed poorly in 2022, with large-cap technology stocks dragging the averages down. These large-cap techs had relatively less impact on foreign equity funds, particularly in Europe. With the ongoing war in Ukraine, there is also a scope of taking advantage of depressed valuations. IXUS’s well-diversified portfolio also carries risk that’s relatively lower than U.S.-based funds. The short term is difficult to predict due to the uncertain economic conditions all over the globe. But if major economies all over the world are able to stay clear of recession, current valuations would make global equity stocks and corresponding equity funds quite attractive.
In my opinion, iShares Core MSCI Total International Stock ETF is not suitable for income-seeking investors due to its low yield, but the kind of total return it generates over the long run should make growth-seeking investors interested in the IXUS ETF.
