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

Investing in the global market can be a smart way to diversify your portfolio and hedge against domestic risks. The Alpha Architect International Quantitative Value ETF, commonly known as IVAL, offers a unique approach to international equity investment. In this blog post, we'll explore what IVAL is, along with its advantages, disadvantages, and investment strategies.

What is IVAL?

IVAL is an ETF that focuses on international value stocks. Managed by Alpha Architect, IVAL stands for Alpha Architect International Quantitative Value ETF. The primary goal of IVAL is to provide investors with exposure to value stocks outside of the United States, leveraging quantitative methods to select undervalued securities.

Unlike traditional value funds that may rely heavily on fundamental analysis, IVAL employs a data-driven, algorithmic approach to pick stocks. This method allows for a systematic and repeatable process, aiming to identify opportunities that are often overlooked by the market.

Key Features of IVAL

• Focus on International Markets: IVAL invests in companies from developed markets outside of the U.S.
• Quantitative Approach: Utilizes a rules-based methodology to identify undervalued stocks.
• Strict Screening Criteria: Includes metrics like low enterprise value to EBITDA, strong free cash flow, and solid balance sheets.

These criteria ensure that the ETF is composed of financially stable companies trading at attractive valuations.

IVAL Composition

IVAL's portfolio includes a diverse range of industries, from industrials and consumer goods to financial services. It steers clear of highly volatile sectors like technology, focusing instead on more stable, well-established companies. Typical holdings in IVAL might include prominent international names like Toyota Motor Corp, Royal Dutch Shell, and Nestlé.

Pros of IVAL

Diversified Exposure

IVAL offers a diversified exposure to international markets, which can reduce the risk associated with investing in a single country or region. This global diversification is beneficial in mitigating the impacts of regional economic downturns.

Quantitative Selection Process

The data-driven approach employed by IVAL helps in eliminating emotional biases from stock selection. This systematic method ensures that only stocks meeting stringent value criteria are included, often resulting in better risk-adjusted returns.

Low Expense Ratio

IVAL boasts a competitive expense ratio of 0.59%, which is relatively low considering the extensive research and quantitative analysis that goes into its stock selection. This makes it a cost-effective option for investors looking for international value exposure.

Focus on Value Stocks

By focusing on undervalued stocks, IVAL aims to achieve higher returns during market recoveries. Value stocks have historically outperformed growth stocks over the long term, especially when markets are correcting or emerging from a downturn.

Cons of IVAL

Sector and Geographic Limitations

While IVAL provides international diversification, it may be heavily weighted in certain sectors or regions. This can expose investors to sector-specific or regional risks, potentially reducing the benefit of diversification.

Volatility

Although value stocks are generally more stable, investing in international equities introduces additional layers of risk, such as currency fluctuations and geopolitical uncertainties. This can lead to increased volatility in the short term.

Limited Performance History

IVAL is a relatively new ETF, with a shorter performance history compared to some of its peers. This limited track record can make it challenging for investors to fully assess its long-term viability and consistency in delivering returns.

IVAL Investment Strategies

IVAL can be a valuable addition to a diversified investment portfolio, particularly for those looking to gain international exposure while adhering to a value-driven investment philosophy. Here are some strategies to consider:

Long-term Investment Strategy

IVAL is best suited for long-term investors who are willing to endure short-term volatility for potential long-term gains. The focus on undervalued international stocks provides a counterbalance to U.S.-centric portfolios. By holding IVAL for a longer period, investors can benefit from the compounding effect of capital appreciation and dividend reinvestment.

Dollar-Cost Averaging

One effective strategy for investing in IVAL is dollar-cost averaging. This involves regularly investing a fixed amount of money, regardless of market conditions. This approach reduces the impact of market volatility and helps in accumulating shares at various price levels, potentially lowering the average cost per share over time.

Use as a Portfolio Complement

IVAL can serve as a complementary holding to a broader portfolio of ETFs and mutual funds. Combining IVAL with other asset classes, such as domestic stocks, bonds, and commodities, can enhance overall portfolio diversification and reduce risk.

Monitor and Rebalance

While IVAL employs a systematic approach to stock selection, it's essential to monitor your overall portfolio and make periodic adjustments. Rebalancing ensures that your portfolio remains aligned with your investment goals and risk tolerance.

Conclusion

IVAL offers a compelling option for investors looking to diversify their portfolios with international value stocks. Its quantitative methodology and focus on undervalued companies provide a unique edge in the world of international investing. While there are potential downsides, such as sector and geographic limitations and increased volatility, the pros often outweigh the cons for long-term, value-focused investors. By employing thoughtful investment strategies like dollar-cost averaging and periodic rebalancing, investors can maximize the benefits of IVAL in their portfolios.