What is IFV? (Pros, Cons, and Strategies)

If you're looking to diversify your portfolio with international investments, you might want to consider ETFs that focus on global markets. One popular option is the First Trust Dorsey Wright International Focus 5 ETF, or IFV. This ETF can offer exposure beyond the U.S. market, providing unique benefits and challenges. In this blog post, we'll delve into what IFV is, its features, pros and cons, and some effective strategies for investing in it.

What is IFV?

IFV is an international ETF that aims to track the Dorsey Wright International Focus Five Index. This is a rules-based index that leverages Dorsey Wright's proprietary relative strength methodology. In simple terms, this means it picks international ETFs that are showing strong momentum relative to others.

Key Features of IFV

• International Focus: Unlike U.S.-centric ETFs, IFV invests in international markets, providing a more diversified exposure.
• Relative Strength Strategy: Uses a momentum-based strategy to select the top five international ETFs that are showing strong relative performance.
• Dynamic Allocation: The composition of the ETF can change periodically based on the relative strength rankings, aiming to capitalize on prevailing market trends.

IFV Composition

IFV's portfolio is composed of various international ETFs that might include sectors like technology, healthcare, industrial, financials, and more from different countries. The ETF is rebalanced on a periodically, ensuring that the holdings reflect the top-performing sectors and regions based on Dorsey Wright's relative strength methodology.

Pros of IFV

Diversification

One of the significant advantages of IFV is its international diversification. Investing in IFV reduces the country-specific risks that might be prevalent in a U.S.-only portfolio. This international exposure can help in balancing the risk and return across different economic cycles and geopolitical scenarios.

Dynamic Strategy

The use of a momentum-based relative strength strategy helps in identifying and capitalizing on currently outperforming sectors and regions. This dynamic allocation can potentially lead to higher returns compared to a static international ETF.

Tactical Exposure

IFV provides a tactical approach to international investing. The ETF reallocates its assets periodically, reflecting the current market conditions. This tactical exposure helps in maintaining or even enhancing performance in changing global economic environments.

Cons of IFV

High Expense Ratio

Compared to other passive international ETFs, IFV has a relatively higher expense ratio because of its active management approach. This can eat into the returns over time, especially for long-term investors.

High Volatility

Due to its relative strength strategy, IFV can be more volatile than traditional international ETFs. The frequent rebalancing can lead to higher turnover, affecting volatility and transaction costs.

Limited Yield

IFV primarily focuses on capital appreciation through momentum investing and may not offer high dividend yields compared to dividend-focused international ETFs.

IFV Investment Strategies

IFV is designed for investors looking to include a dynamic, tactical, and international element in their portfolios. Despite its higher expense ratio and volatility, the ETF's unique strategy offers potential benefits, particularly for those with specific investment goals.

Tactical All-In Approach

For investors who rely on tactical allocation, IFV offers a robust option. By monitoring and leveraging the strongest international sectors and regions, IFV can be an integral part of a broader tactical investment strategy. This approach works well for investors who are willing to accept the higher risks for potential higher returns.

Complementary Investment Strategy

IFV can serve as a complementary investment within a more extensive, diversified portfolio. If you're holding a large proportion of U.S.-centric investments, including IFV can provide the necessary international exposure. This strategy helps in balancing the portfolio and spreading out risks.

Medium to Long-term Investment

While IFV isn't necessarily a short-term play due to its dynamic nature, it can fit well with medium to long-term investment horizons. Over time, the momentum strategy can yield considerable returns, making it a suitable option for investors with a longer time frame.

Conclusion

IFV is an intriguing option for those looking to diversify internationally through a momentum-based strategy. Its dynamic approach to asset allocation offers unique advantages, though it comes with its own set of challenges. Whether or not IFV is suitable for you will depend on your risk tolerance, investment goals, and time horizon. Carefully weigh the pros and cons, and consider speaking to a financial advisor before making any investment decisions.