The 45th President of the USA likes to say “America First,” which is great in our view, but global diversification can be very powerful. Case in point, the US dollar has declined sharply versus the euro (EUR) so far this year (after a “yuge” November rally). This article highlights our holdings in US companies with significant non-US exposure as well as our non-US holdings. In addition to the diversification benefits, we believe there could be more rewards ahead for investors with overseas exposure.
In this week’s Blue Harbinger Weekly, we provide a brief performance review and outlook for each of the 28 holdings across our Blue Harbinger strategies. We also provide access to a members-only report on our “Top 3 Covered Call Stocks.” Lastly, you’ll notice we’ve updated performance though the end of July, and all three Blue Harbinger strategies continue to significantly outperform.
iShares Core MSCI Total Int'l Stock ETF (IXUS)
Expected Return: 9% per year
Expected Volatility: 25.0% per year
As long-term investors, we believe the equity markets will increase over time, and the international (non U.S.) developed and developing (emerging) markets (countries with developed and developing economies) portion of the equity markets will increase at a slightly better rate than the U.S. market, albeit with higher volatility. Non-US exposure also provides very important diversification benefits that are not available by investing in U.S. markets alone. The iShares Core MSCI Total International Stock ETF (ticker: IXUS) offers reliable exposure to the returns of international markets while avoiding the many pitfalls that are common among other ETFs and among other equity investments in general.
IXUS invests in over 3,300 non-U.S. stocks from over 40 developed- and developing-market countries. At least 90% of its assets are invested in securities of the underlying index (MSCI ACWI ex U.S. IMI). The “IMI” portion of the index is important (it stands for Investable Market Index) because in addition to large cap and mid cap stocks, it also includes the small cap portion of the market (the version of the index without the “IMI” is only large cap and mid cap). The fund may invest the remainder of its assets in certain depository receipts and derivatives such as futures, options, swap contracts and cash equivalents. The index is one of the most commonly followed equity indices in the World, and is largely considered the standard benchmark for non-U.S. developed and developing market stocks. The performance of IXUS has historically matched the performance of the MSCI ACWI ex U.S. IMI very closely, and it should continue to track closely in the future because of its construction methodology. Investors cannot purchase the actual index, and IXUS is the next best thing.
Volume and Liquidity:
As a standard ETF, IXUS has significant volume and liquidity (total IXUS assets exceed $1.7 billion). Because of the volume and liquidity, the bid-ask spread is small (the bid-ask spread is the difference in price at any given time for someone buying the security and someone selling it. There is a difference because the middle man takes a very small cut). A small bid-ask spread is good because it saves you money when you trade. Second, IXUS trades very close to its net asset value (NAV) because of the large volume and liquidity. NAV is the actual value if you add up the value of all the securities held within IXUS. For many less liquid ETFs, the NAV may vary from its actual market price (the price the ETF trades at in the market). This makes IXUS much less risky for investors compared to other ETFs that may vary widely in price versus NAV. Additionally, small investors don’t have to worry about some big investor coming in, buying or selling an enormous amount of IXUS, and subsequently adversely moving the market price away from its NAV because the volume of IXUS is already so great that this risk is essentially non-existent. Additionally, in the extremely rare case where a big trade could cause a big discount or premium, the fund manager (iShares by BlackRock) has the sophistication to engage in open market trading activity to avert the large mispricing relative to the NAV (some other ETF managers do not have this same level of sophistication).
The net expense ratio on IXUS is currently 14 basis points (0.14%). This is extremely low for international market exposure; it is good for investors because it allows them to achieve better returns on their investment. For comparison, international mutual funds (a common competitor to ETFs) may charge over 300 basis points (3.0%) per year, and they tend to deliver worse performance over the long-term. Additionally, there is no expensive sales charge or separate investment advisor fee because IXUS can be purchased directly through a discount broker (e.g. Scottrade, E*TRADE, TD Ameritrade, Interactive Brokers, etc.). The discount broker may charge you a one-time trading fee of $8 or less, but this is much better than the 3-5% sales charge/management fee you’d get charged by a full service financial advisor. Additionally, there is no hidden 25 basis point (0.025%) annual 12b-1 fee paid to someone for “servicing your account.” The bottom line here is that IXUS is a very low cost way to get great exposure to the equity market and to build considerable wealth over the long-term.
One last point of consideration, IXUS pays a quarterly dividend (around 2.57% per year), and this dividend is NOT automatically reinvested back into IXUS (this is standard protocol for ETFs and stocks). This means you’ll build up a cash balance in your account if you don’t withdraw it or manually reinvest it. As a long-term investor, cash is generally a drag on investment performance. Unless you plan to withdraw and use the cash, we highly recommend you develop a process to reinvest it. Most discount brokers (Scottrade, Interactive Brokers, etc.) offer automatic dividend reinvestment programs. We highly recommend you sign up for these programs to avoid the situation where cash builds up in your account and becomes a drag on your long-term investment performance. Reinvesting dividends is important.
IXUS is a very low cost, relatively low risk, security that allows investors to build significant wealth over the long-term. We consider IXUS to be a basic building block for long-term wealth, and we rate IXUS as a “Buy.” For more information, you can view the fact sheet for this ETF here.