The Touchstone Dynamic International ETF (TDI) offers investors a fresh approach to global investing, combining active management with a focus on high-quality companies across international markets. In an interview with The Wealth Advisor, co-CIO Hal Reynolds explains how TDI aims to deliver consistent returns by identifying strong operators with improving fundamentals while navigating the complexities of different global regions.
In a world where US markets frequently take center stage, international opportunities are often overlooked. Enter the Touchstone Dynamic International ETF (ticker: TDI), a fund designed to bring global exposure to investors’ portfolios through a careful balance of active management and a focus on fundamental quality.
Hal Reynolds, the manager behind TDI, shares his insights with The Wealth Advisor’s Scott Martin on why this exchange-traded fund (ETF) stands out in the crowded international investing space and how it can serve as a valuable tool for advisors seeking global diversification.
With an increasingly interconnected financial landscape, international markets offer vast potential, but they require a nuanced approach to capture sustainable returns. Reynolds discusses how TDI addresses these challenges, explaining the fund’s strategy and the opportunities it provides for advisors looking to broaden their clients’ portfolios beyond US borders.
The Global Advantage: Forward-Looking Strategy
Investing internationally can be daunting, especially given the complexities and risks that come with different markets and economies. However, Reynolds highlights the importance of staying flexible and adapting to shifting global landscapes, rather than relying on outdated strategies. He states, “The non-US equity markets offer some great opportunities, but one needs to be forward-looking.” This farsighted approach sets the tone for TDI’s investment philosophy. In contrast to many ETFs that stick to rigid value or growth strategies, TDI adapts based on market conditions.
“If you look at the history of active management, it’s been pretty good in non-US markets,” Reynolds explains, emphasizing the importance of being adaptable.
He describes how TDI differentiates itself by avoiding the pitfalls of locking into a single investment style. “Managers tend to either have a value bias or a growth bias, or maybe a defensive bias,” he says, but points out that the real value comes from recognizing that different markets require different approaches at any given time. For example, the optimal strategy for Europe might differ from that of emerging markets or Japan.
“You really need to understand the unique circumstances of each market, and if you do that, you’ll be able to generate very consistent returns relative to a cap-weighted index. And that’s what we’re doing with TDI,” Reynolds adds.
Finding the Right Companies: A Bottom-Up Approach
TDI’s investment strategy is decidedly bottom-up, meaning that if the team identifies a great company, they’ll invest regardless of where it’s domiciled. “You need to look across markets and across industries,” Reynolds explains. “The key is really finding great companies that offer good forward-looking discount rates,” he adds, pointing to the importance of fundamental momentum.
This bottom-up focus enables TDI to avoid the pitfalls of concentrating too much capital in a handful of mega-cap companies, a significant issue in the US stock market. “You’ve got much better diversification from an industry standpoint and from a company standpoint,” Reynolds says. “When you start thinking globally, you’re able to find very attractive investments, which leads to more consistent excess returns versus the cap-weighted benchmarks.”
Reynolds warns about the dangers of falling into “value traps” where a company might seem attractively priced but is fundamentally weak. “So often, particularly for value managers, they might find companies that are well-managed and attractively priced, but the fundamentals are going the wrong way,” he explains. The solution is to look for “great operators, good discount rates, and fundamental momentum”—a three-pronged approach to finding stocks that offer value and growth simultaneously.
Diversification: A Global Necessity
Diversification is at the core of the TDI strategy. While US markets have been dominated by a few mega-cap growth companies, Reynolds highlights how TDI takes a different path. “You’re getting much better diversification in non-US markets. You don’t have the top-heavy problem that we have in the US,” he points out. By spreading investments across markets and industries globally, TDI offers better balance and reduces concentration risk.
Reynolds also emphasizes the potential for more consistent returns in non-US markets, noting that “they’re not as efficiently priced, and one can gain an information advantage.” The inefficiency in these markets, according to Reynolds, provides opportunities for active managers such as Touchstone to find undervalued companies that may be overlooked by more index-based strategies.
Momentum Investing: The Right Kind
Although momentum investing has been a popular strategy, Reynolds takes a cautious approach. “We know momentum’s an interesting concept,” he says, but adds that TDI focuses on fundamental momentum rather than purely price-based trends.
“If the fundamentals warrant the price increase, we’re totally comfortable with it,” he explains, noting that TDI avoids speculative momentum, which often leads to crashes. The careful balance between growth and value, with a focus on underlying fundamentals, positions TDI to navigate volatile markets successfully.
The Importance of Currency Risk
Currency risk, often a secondary consideration for many investors, plays a significant role in TDI’s investment strategy. Reynolds explains that currency swings, once a major factor in global investing, have been somewhat overlooked in recent years. “We’ve been put to sleep a little bit,” he says, referring to the relatively calm period in currency markets over the past decade.
However, he warns that as central banks diverge in their monetary policies, currency risks may become more pronounced. “We might see greater differences in interest rates in the coming decade than we’ve seen in the past decade,” he notes. TDI takes this potential disparity into account by incorporating currency risk into its models, looking at factors such as revenue sources and cost structures to determine how currency movements might affect the companies in its portfolio.
“One of the factors in our model is looking at the source of revenues and what sort of mix there is in terms of exposure based on currency moves and what that might mean for the top line and then ultimately the bottom line,” he says.
The Case for International Investing: Value and Growth
One of the most compelling reasons for considering TDI, according to Reynolds, is the valuation gap between US and non-US equities. “The bottom line is they’re one-third cheaper than US companies, and that just can’t be ignored,” he states. While the US market has been buoyed by the growth of technology stocks, international markets offer more attractive valuations for well-managed companies across various sectors. “If you really think about the great drug companies in the world, the great auto companies, the great energy companies, so many of them are outside of the US,” he says.
Reynolds acknowledges that US investors have been drawn to domestic markets due to the explosive growth in technology, particularly with the AI push this year, but cautions against extrapolating these growth rates indefinitely. “Competition will bring those profit margins down for those big companies that trade at 30, 40, 50 times earnings, and those multiples are not sustainable,” he warns. “And so again, it gets back to really enjoying the benefits of a more diversified portfolio to protect the downside.”
A Tactical Tool for Advisors
TDI can serve as both a strategic allocation and a tactical tool for advisors, Reynolds believes. “It can be the strategic allocation to non-US securities,” he says, highlighting its low trading costs and broad diversification. With more than 120 securities in the portfolio, TDI provides access to a wide range of companies that are not only well-managed but also undervalued.
For advisors looking to be more tactical, Reynolds suggests that TDI can help manage growth and value shifts dynamically. “Maybe with a bit of a growth unwind, but why not have exposure to both defensive companies and well-managed value companies?” he asks. The flexibility and dynamic nature of TDI allow it to play a key role in building resilient, diversified portfolios.
Looking Ahead: Active Management in a Changing World
For advisors seeking to diversify their clients’ portfolios, TDI offers a compelling solution. Its active approach to international investing, combined with its focus on quality and fundamentals, makes it a valuable tool for enhancing global exposure.
“Avoiding those low-quality companies in those environments, those that aren’t operating well, whose cash flows aren’t robust or sustainable, that’s when active management perhaps shines the most,” Reynolds says.
He notes that while the tailwinds of low interest rates and monetary stimulus may fade, the ability to identify well-managed companies will be even more critical in the coming years, as the gap between successful companies and struggling ones could widen significantly.
“Returns have been above expectations because of low interest rates and monetary stimulus. We’re not going to probably have that at our back in the next decade,” he says. “But at the same time, the difference between the winners and the losers could be greater in the next 10 years than it’s been. And I think that’s the real opportunity.”
For those in search of an innovative and future-focused approach to international equities, TDI presents a highly attractive option. With its focus on strong fundamentals, careful consideration of currency risk, and an eye on the future, this ETF stands out as a strong contender in the global investing space.
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Additional Resources
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Disclosures
Investing involves risk, principal loss is possible.
TDI Risk:
The Fund invests in equities which are subject to market volatility and loss. The Fund invests in preferred stocks which are relegated below bonds for payment should the issuer be liquidated. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing their price to decline. The Fund invests in foreign securities, including depositary receipts, such as American Depositary Receipts, Global Depositary Receipts, and European Depositary Receipts, which carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. Touchstone exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETFs are bought and sold through an exchange at the then current market price, not net asset value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF's listing will continue or remain unchanged.
The Adviser engages a sub-adviser to make investment decisions for the Fund’s portfolio; it may be unable to identify and retain a sub-adviser who achieves superior investment returns relative to other similar subadvisers. Events in the U.S. and global financial markets, including actions taken to stimulate or stabilize economic growth may at times result in unusually high market volatility, which could negatively impact Fund performance and cause it to experience illiquidity, shareholder redemptions, or other potentially adverse effects. Financial institutions could suffer losses if interest rates rise or economic conditions deteriorate. The Fund uses proprietary statistical analyses and models to construct the portfolio, models can perform differently than the market as a whole. The Fund may be more or less exposed to a risk factor than its individual holdings. Quantitative models are subject to technical issues which could adversely affect their effectiveness or predictive value.
The Fund’s investments in other investment companies will be subject to substantially the same risks as those associated with the direct ownership of the securities comprising the portfolios of such investment companies, and the value of the Fund's investment will fluctuate in response to the performance of such portfolios. In addition, if the Fund acquires shares of investment companies, shareholders of the Fund will bear their proportionate share of the fees and expenses of the Fund and, indirectly, the fees and expenses of the investment companies or ETFs. Current and future portfolio holdings are subject to change.
Please consider the investment objectives, risks, charges and expenses of the ETF carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one at TouchstoneInvestments.com/resources or call Touchstone at 833.368.7383. Please read the prospectus and/or summary prospectus carefully before investing.
Touchstone ETFs are distributed by Foreside Fund Services, LLC.
Wealth Advisor and Touchstone Investments are not affiliated. Wealth Advisor and Foreside Fund Services, LLC, are not affiliated.
