International Value Indexing

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ThisDinosaur
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International Value Indexing

Post by ThisDinosaur » Mon Dec 26, 2016 2:08 pm

I'd like to put together a minimal expense, global stock index portfolio with weighting toward low CAPE countries.
What's the best way to do this? What ETFs or Funds should I use?

http://www.starcapital.de/research/stockmarketvaluation

I've been investing heavily in VEMAX, but I missed out on the big jump in Russia's market (https://finance.yahoo.com/quote/ERUS?ltr=1) since the election because vanguard's emerging market fund is, like, 1/3rd China and only 4% Russia (https://personal.vanguard.com/us/funds/ ... =INT#tab=2).

Lucky C
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Re: International Value Indexing

Post by Lucky C » Tue Dec 27, 2016 6:34 am

The expenses aren't minimal for country-specific ETFs compared to Vanguard's low expenses, but they're not terrible either. For Russia I use RSX with 0.67% fee, but there is also ERUS with 0.62% fee.

I use VEMAX and VEUSX for most of my international investing, then add a few ETFs to overweight the cheaper countries. With VEMAX being 30% China and VEUSX being 30% UK that covers enough of those countries for cheap. Then I have RSX for Russia, EWI for Italy, EWP for Spain, EWY for South Korea, and EWS for Singapore. The iShares funds seem to have the most trading volume for most countries. I went with the VanEck RSX for Russia because its sector allocation is a bit more diversified than iShares ERUS, but ERUS has done a little better this year as oil recovered and still has lower P/E and P/B than RSX - oh well!

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Chad
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Re: International Value Indexing

Post by Chad » Tue Dec 27, 2016 8:47 am

There are some beta ETFs you might look at. All of them use certain predefined formulas to select countries and stocks. They are not actively managed, which means a lower expense ratio, but not as low as pure indexes.

GVAL (exp .59%)
http://www.cambriafunds.com/gval.aspx

INTF (exp .30%) and EMGF (exp .45%)
https://www.ishares.com/us/products/272822/INTF
https://www.ishares.com/us/products/272820/EMGF
and the site for all of Blackrocks beta ETFs
https://www.blackrock.com/tools/factor- ... s#/results

Added: I forgot to add that GVAL actually starts by selecting low CAPE countries.
Last edited by Chad on Tue Dec 27, 2016 12:21 pm, edited 1 time in total.

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Tyler9000
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Re: International Value Indexing

Post by Tyler9000 » Tue Dec 27, 2016 11:48 am

The two most "pure" International Value index funds I'm aware of are VTRIX and EFV.

ThisDinosaur
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Re: International Value Indexing

Post by ThisDinosaur » Wed Dec 28, 2016 9:43 am

GVAL looks like the most promising of those to me, I guess. Although I'd like to know more about their "Proprietary long term valuation metrics."
It seems to be the only one of those value funds that even mentions national CAPE 10 in the prospectus.

Can anyone tell me why all of these funds have such few holdings? RSX has 30, ERUS has 20. Compare to VTSAX that has >3,000, and VFIAX that has 500. Is this just a function of the size of the countries in question? Russia is a pretty big country and EFV represents at least a dozen different countries, but only has 500 holdings.

Also, why are so many of these funds so heavily weighted into Japan and the UK? Is it due to Market Cap ?

And, Tyler9K, what do you mean by "pure?"

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Tyler9000
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Re: International Value Indexing

Post by Tyler9000 » Wed Dec 28, 2016 11:55 am

ThisDinosaur wrote:GVAL looks like the most promising of those to me, I guess. Although I'd like to know more about their "Proprietary long term valuation metrics."
It seems to be the only one of those value funds that even mentions national CAPE 10 in the prospectus.
That's because most indexes do not use CAPE as the measure of value (at least not solely). They generally use a mix of a dozen or so metrics to find the half of the market they consider undervalued. And yes, the entire market may be overvalued and the "value" fund will often simply be the half that is less overvalued than the rest.
Also, why are so many of these funds so heavily weighted into Japan and the UK? Is it due to Market Cap ?
Yes -- most likely. There also may be manager bias if the fund does not passively follow an index.
And, Tyler9K, what do you mean by "pure?"
By "pure" I mean that they follow a broad collection of All-World (ex US) or EAFE countries and filter the results only by valuation. I personally prefer EFV because it's truly passive and tracks more companies.

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Re: International Value Indexing

Post by userqname » Wed Jan 04, 2017 6:00 pm

GUR - SPDR S&P European Emerging Market ETF.
For a lower expense ratio (0.49) than RSX or ERUS, you get exposure to Russia, Turkey, Poland, Greece, Hungary, and Czech. All of which are undervalued countries. And it compliments VEMAX.

ThisDinosaur
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Re: International Value Indexing

Post by ThisDinosaur » Wed Feb 08, 2017 2:21 pm

@LuckyC & Tyler9K
Yes, I have been spoiled by Vanguard's low cost. HOWEVER, VTRIX is nearly as expensive as these country-specific ETFs and is heavy in the same undesireable countries (Japan and UK) I already own in VTMGX. I'll be dollar cost averaging into these funds, so a low cost mutual fund would be preferable to an ETF. But I can't seem to find anything that is the equivalent of a Total Stock Market Mutual Fund for specific non-US countries.

I was considering taking the plunge and buying some Norway (NORW)(er=0.5) because I think it has less geopolitical risk than emerging markets PLUS it has a degree of energy independence, but its non-CAPE value metrics are all worse than China, which I already own in VEMAX.

It occurs to me that the suggestion I've heard to "make your own index" would be very expensive given commission/transaction costs.

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Re: International Value Indexing

Post by Lucky C » Wed Feb 08, 2017 7:30 pm

Norway generally looks good in terms of valuation. However NORW's top holding is an oil company with 17.6% weighting, with energy being 30.8% overall, so you don't really get a lot of stability with that fund when it has so much dependency on oil. Check out this comparison: invest in oil companies with no-fee CVX in expensive USA, 0.67% fee with cheap RSX, or 0.5% with fairly valued NORW. Sure, RSX and NORW are only partially oil companies, but they move the same way as CVX / oil prices with what looks to be the same amount of volatility. With this comparison, I would rather pay the slightly higher fee and get the much cheaper RSX, and then diversify with other companies/sectors that are not so dependent on oil prices. For instance, for some European diversification I would rather have countries like UK, Spain, Italy, and keep Russia as my "oil country" allocation.

I expect that in a few short years we are likely to be back to decent valuations in the US again. Then we'll have plenty of opportunities to "create our own index" of U.S. companies, which can be done inexpensively. Of course it depends not just on the fee per trade but on how much and how often you're trading. If you have $500k and make 10 trades per year at $5 apiece, that's only 0.01% in annual trading fees. 90% lower cost than a Vanguard fund at 0.10%!

ThisDinosaur
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Re: International Value Indexing

Post by ThisDinosaur » Thu Feb 09, 2017 8:18 am

Excellent comparison, Lucky C. And I agree, that the slightly higher fee for RSX is worth it IFF it performs as expected.

Again, ideally I'd like to dollar cost average into these undervalued countries the way a boglehead DCAs into VTSAX. With a long time horizon. Its worth noting that, when comparing valuation metrics, China and Russia consistently come out on top. So maybe more VEMAX with a relatively smaller position in RSX is adequate for my goals.

RSX seems to have the highest Trading Volume of these Russia funds, but I don't know how important that is if I'm planning on holding it for several years. Any thoughts?
Also, Is currency risk more or less important with long time horizons? My impression is its less, but I don't know.

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Re: International Value Indexing

Post by Ontarian » Thu Feb 09, 2017 9:51 am

From what I understand, a low trading volume for a given ETF is not a major concern as long as the stocks it holds are reasonably liquid. See this article for example: http://www.etf.com/etf-education-center ... idity.html

ThisDinosaur
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Re: International Value Indexing

Post by ThisDinosaur » Fri Mar 17, 2017 1:28 pm

I saved up enough to buy, in a single trade, enough shares of RSX so my Russia exposure equals my China exposure (which is all in VEMAX).
Plan was, Singapore next month (EWS)[CAPE 11.4], then South Korea (EWY)[CAPE 13], followed by either Italy (EWI)[CAPE 12.7] or Spain (EWP)[CAPE 11.7]. I ranked them based on CAPE, Price to Book, and Market Cap to GDP.

BlueNote threw a monkey wrench into my plan by mentioning variable foreign withholding taxes in another thread. (viewtopic.php?f=3&t=7200&start=25)

http://www.dividend.com/dividend-educat ... nd-stocks/
This is one of the first links I found when researching the topic. Russia's foreign withholding tax is listed as 15%, which is on the low end for that list. And given Russia's expected return, should be acceptable. South Korea is listed as one of the highest with a rate of 27.5% foreign withholding tax on dividends. Same as Italy at 27%, and I found some other articles supporting the idea that Italy's stock prices are so low partly *because* their tax system is unfavorable for foreign investors. Spain is 19% tax and Singapore isn't on the list.

I may have to rethink this strategy. Thoughts?

ThisDinosaur
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Re: International Value Indexing

Post by ThisDinosaur » Fri Mar 17, 2017 2:10 pm

Reviewing some more. Comparing Singapore to S. Korea, Singapore comes out very far ahead on Market Cap:GDP, noticeably ahead on CAPE10, and only imperceptibly below Korea on PB. If this tax issue is significant, I'm thinking I'll just disregard EWY. Comparing Italy to Spain, they are neck and neck on all three metrics, but Italy comes out ahead on MkCp:GDP and PB, but loses on CAPE. I would see it as a wash and buy both except for the tax issue, now.

I'm weighing my desire to diversify broadly vs. increase my average expected return.

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Re: International Value Indexing

Post by Lucky C » Sat Mar 18, 2017 5:06 am

What about when considering sectors? EWP is 43% financials, 14% industrials, 11% utilities... EWI is 34% financials, 22% energy, 15% utilities...

If you like a more balanced fund then maybe EWI is better for you. However if you're already overweight in energy then maybe EWP is more appealing.

Last year financials were getting hammered globally and I bought some Santander. SAN is currently 19% of EWP so it's a decent surrogate for "owning Spain" without the ETF fee but of course with less diversification. But the price happened to rebound quickly and I felt like lowering portfolio volatility so I sold it after a short holding time.

@userqname GUR is a nice find. Thanks for sharing, I hadn't heard of it before.

ThisDinosaur
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Re: International Value Indexing

Post by ThisDinosaur » Sat Mar 18, 2017 8:06 am

@Lucky C
VEMAX is mostly (24-29%)Financials. VTMGX is 20%.
http://portfolios.morningstar.com/fund/ ... ture=en-US
http://portfolios.morningstar.com/fund/ ... ture=en_US

That was a great consideration you made about oil wrt Norway vs. Russia. It convinced me to drop Norway and just pick RSX. Likewise, if I'm already overweight financials, that's a strong argument *against* EWP.

Also, when looking at GUR, it is mostly Russia. GUR is a lower price and more diversification, but RSX has a higher trading volume. And most of Emerging Europe's attractive valuation is from its heavy weighting in Russia. So I decided to go all in RSX, risk-barbell style.

ThisDinosaur
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Re: International Value Indexing

Post by ThisDinosaur » Sun Oct 15, 2017 11:21 am

http://www.starcapital.de/research/stoc ... valuation
Czech republic has made its way to the top of the Value list. (CAPE=9.3). But there don't seem to be any ETFs that can really capture this. Any thoughts? How can I get diversified exposure to that market?

Honestly, there doesn't seem to be much value left anywhere with this strategy. World CAPE is 23.3 with a PB of 2.1. Even Emerging Markets CAPE is up to 16.5.

Maybe the tea leaves are trying to tell me something.

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bryan
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Re: International Value Indexing

Post by bryan » Mon Oct 16, 2017 8:32 pm

I ran into the same issue when looking to invest in some emerging markets: public stock markets in the US don't have instruments to capture the exposure I want. The common situation is only having access to exposure via the countries largest corps (maybe) or some sort of proxy like banking (which I am largely allergic to after 2008 and emergence of crypto-currencies). I didn't check to see if I could trade on the countries' own stock exchanges.

So what to do? I don't really know since I mostly gave up. I did get far enough in my research to find some private investment firms with exposure, but good luck getting a slice if you aren't already wealthy. The easy solution would probably be to buy some real estate in the area (which I also detest, being fundamentally against gross rentier behavior)..

Tangentially, the US stock market is also losing it's luster thanks to the trend of companies avoiding being publicly traded, and instead rely on private capital or loans. Being an accredited investor in the USA allows you more access; I'm not sure how it is in other countries. Maybe international corporate bonds are a good deal?

Maybe some countries don't have as strict regulations as the US in regards to investors, securities? Maybe it's possible to go to some corporations website and invest directly? Innovations like Bitcoin et al may end up making securities markets more accessible.

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Seppia
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Re: International Value Indexing

Post by Seppia » Tue Oct 17, 2017 3:00 pm

ThisDinosaur wrote:
Sun Oct 15, 2017 11:21 am
http://www.starcapital.de/research/stoc ... valuation
Czech republic has made its way to the top of the Value list. (CAPE=9.3). But there don't seem to be any ETFs that can really capture this. Any thoughts? How can I get diversified exposure to that market?

Honestly, there doesn't seem to be much value left anywhere with this strategy. World CAPE is 23.3 with a PB of 2.1. Even Emerging Markets CAPE is up to 16.5.

Maybe the tea leaves are trying to tell me something.
Keep into account the size of what you're considering.
It looks like the total Czech market cap is around 27.6 billion usd
http://sdw.ecb.europa.eu/quickview.do?S ... E0.MKP.W.N
That's what? Like 0.4 Ubers?

I find very little undervalued stuff today, I would look into Europe and Emerging markets for equities

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Re: International Value Indexing

Post by jacob » Tue Oct 17, 2017 3:19 pm

I always blows my mind how the market cap of fancy FAANG companies with some thousand employees often have market caps exceeding that of entire "small" countries with millions of citizens. Then I realize market cap is just margin-valuation and that the 1-1 exchange of X-FAANG company for Y-country would never work out once the former starts selling and the latter start buying.

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Seppia
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Re: International Value Indexing

Post by Seppia » Tue Oct 17, 2017 3:40 pm

Some valuations are clearly stupid, I picked Uber which is in my opinion among the stupidest (Tesla being the absolute king), but I think my main point stands.
What I was trying to say is that the list from Starcapital has to be taken with a pound of salt, it's not like all countries on there are interchangeable.

ThisDinosaur
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Re: International Value Indexing

Post by ThisDinosaur » Wed Oct 18, 2017 9:01 am

Yeah, I've noticed that some of the best values have some of the smallest markets. I noted earlier in the thread that the Russian's benchmark index is 20-30 companies, vs. 500-3,000 companies for US's most popular index funds. This particular problem gets better the more internationally diversified I get though. Even if my single largest holding is some Korean company, it will likely never be more than 1% of my total portfolio.

I suspect the absence of a Czech ETF may be part of the reason their market is so cheap. Its inconvenient for lazy foreign money to get there.

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Re: Brazil vs. Greece

Post by ThisDinosaur » Wed May 16, 2018 8:58 am

I'm considering adding another country to this list. And, at the moment, I'm considering Brazil (EWZ) vs. Greece (GREK).

The argument for Brazil is that its CAPE is 12-15 right now, and I don't have much other exposure to South America.
OTOH, its priced at twice book value.

The argument for Greece is mainly the PB of 0.7, and my subjective impression that its a very contrarian bet right now. (Is the negative CAPE 10 from negative average earnings?)

Thoughts?

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Re: International Value Indexing

Post by jacob » Thu May 17, 2018 11:03 am

I think Greece is mainly a bet on what kind of deals the Greeks can negotiate with the EU (~the Germans). The Greek situation is ongoing/unresolved.

Also, note that bookvalue is similar to earnings in that people can make up whatever they want (if you want the "right" number you have to do it yourself ala Graham's Security Analysis). For example, "goodwill" can be counted as bookvalue ... as can old junk if valued at acquisition cost. Case in point, the book value of a used RV >> resale value. This also holds for some people's collection of yarn :P

One factor I'd add to this strategy is the country's credit rating.

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Re: International Value Indexing

Post by ThisDinosaur » Thu May 17, 2018 1:58 pm

As per S&P:
Brazil's credit rating is BB- , outlook "stable"
Greece's credit rating is B, outlook "positive"

I would expect a country whose securities market is undervalued to also have a poor credit rating. The theoretical advantage of CAPE10 is that it is backward looking and quantifiable, whereas a credit rating is a forecast. Forecasts are consistently unreliable.

Although maybe an upward trend in credit rating over time would function as a momentum signal?

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