In the world of investing, the demand for innovative financial products is on the rise, and innovation continues to shape the way investors access global markets. One of the most significant developments is the trend of converting traditional mutual funds into exchange-traded funds (ETFs), offering investors more tax-efficient, cost-effective, and liquid vehicles.
Among the companies leading this charge is Touchstone Investments, which has strategically transformed its international mutual fund into the Touchstone Dynamic International ETF (ticker: TDI). The shift signals a strategic decision to leverage the benefits of the ETF format while providing a robust investment strategy designed for today’s evolving markets.
Matt Barry, VP, Product Management & Head of Capital Markets at Touchstone, spoke with The Wealth Advisor’s Scott Martin on this development, explaining that the conversion to an ETF is not merely a response to industry trends; it represents a commitment to delivering greater value to investors through an innovative and efficient investment vehicle.
Barry highlights that TDI aims to offer a compelling option for advisors seeking dynamic international exposure, reflecting Touchstone’s dedication to adapting to the changing needs of the market. The combination of the ETF structure with a forward-looking investment strategy sets the stage for TDI to stand out in an increasingly competitive space.
A New Era for TDI: Mutual Fund to ETF
At the close of 2023, Touchstone made the strategic decision to convert its international mutual fund into the Touchstone Dynamic International ETF. According to Barry, this change is more than just a structural shift; it represents a significant enhancement in value for investors.
“We’re really excited about providing investors with the benefits of the ETF vehicle, so the tax efficiency, the liquidity, the lower cost profile, and combining that with the investment strategy where we brought in Los Angeles Capital Management to run their AcquiX US International equity strategy inside the portfolio,” Barry explains.
The conversion to an ETF aligns with a broader trend in the financial industry, where ETFs are becoming the preferred vehicle due to their inherent advantages over traditional mutual funds. Barry highlights that the goal is to combine these vehicle benefits with a robust investment strategy, presenting a compelling opportunity for investors seeking efficient international market exposure.
Los Angeles Capital’s Dynamic Approach
One of the key differentiators for the TDI ETF is the involvement of Los Angeles Capital Management. Barry emphasizes the unique nature of LA Capital’s approach, which is grounded in their dynamic alpha stock selection model, based on the investor preference theory. “LA Capital has a very unique investment approach. Everything they do is based on their dynamic alpha stock selection model, and it’s all based on the investor preference theory,” says Barry.
The adaptive nature of LA Capital’s strategy sets it apart from traditional quantitative models that often rely on historical data to predict future trends. Barry notes the drawback of backward-looking strategies: “Quant managers look at what’s worked the past 10, 20, 30 years and then assume that the future is going to look a lot like the past few decades have. The problem with that is that markets are constantly evolving, they’re constantly changing. Tomorrow might look very different.”
In contrast, LA Capital’s forward-looking methodology focuses on designing a portfolio that responds to the current market environment. This adaptability allows them to optimize the portfolio based on the factors and stocks that are expected to perform well in the near term, a significant advantage in a constantly changing global landscape.
TDI’s Global Reach and Targeted Strategy
The TDI ETF’s investment universe is expansive, covering both developed and emerging markets outside the United States. Barry outlines the ETF’s allocation strategy: “The universe for this strategy is the AcquiX US. So, it’s basically the world outside of the U.S., including both developed market stocks and then emerging market stocks that will probably be about 25 to 30% in emerging markets, with the bulk of the portfolio in developed markets.”
This comprehensive approach positions TDI as a one-stop shop for international exposure. The portfolio includes around 100 to 140 stocks, carefully selected to represent LA Capital’s best ideas based on current market conditions. Barry explains the high active share of the ETF, stating that it focuses on “what factors they’re seeing, investors showing a preference for today,” ensuring that the portfolio remains relevant and competitive.
Adaptability in Factor Selection
One of the standout features of the TDI ETF is its flexibility in factor-based investing. Unlike static factor strategies that rely heavily on historical performance, LA Capital’s model adjusts based on real-time market conditions. “Most factor strategies out there are fairly static. The problem is that even though some factors like value have shown to work over the long term, they can underperform for extended periods,” says Barry. He adds that LA Capital’s model is designed to shift between factors like value, growth, and others depending on what the data indicates is currently in favor.
Barry points to high-quality growth stocks as a current focus area for the model. “Right now, they’re favoring more of a high-quality growth outlook based on today’s environment,” he notes, highlighting that the model dynamically adapts to investor preferences and market signals.
The Case for International Exposure
Despite the U.S. market’s dominant performance in recent years, Barry believes that maintaining a diversified portfolio with international exposure is crucial for long-term success. He acknowledges that U.S. stocks, particularly large-cap growth names, have outshone their international counterparts, but he urges investors to take a longer-term perspective. “A lot of times these things are cyclical. If you’ve gone back to the 2000s, it’s the opposite where emerging markets had their time to shine,” Barry remarks.
He sees compelling opportunities in international markets, especially considering current valuations and the strength of the U.S. dollar. “Given the run that the U.S. has had, there are some compelling opportunities we’re seeing to buy cheap internationally,” Barry states. He emphasizes that Touchstone has put significant effort into building out its international product roster, believing that a forward-looking investment strategy in this space could yield attractive returns.
Sub-Advisor Change and Institutional Experience
A significant aspect of the TDI ETF’s evolution is the sub-advisor change that took place during the conversion process. While this may raise questions for some investors, Barry clarifies the rationale behind this move. “We did make a sub-advisor change at the time of the conversion,” he explains, noting that Los Angeles Capital brings a decade of experience managing this strategy for institutional clients, with a broader track record spanning 20 years.
Barry highlights LA Capital’s strong institutional background, managing over $30 billion in assets for pension plans and other large clients. This institutional pedigree is now accessible to a wider range of investors through the TDI ETF, making it an attractive option for those seeking a sophisticated, professionally managed international portfolio.
The Investment Opportunity in TDI ETF
Barry concludes with a strong endorsement of the TDI ETF as a cornerstone for international exposure in any diversified portfolio. He stresses the benefits of converting the mutual fund to an ETF structure, highlighting the advantages of tax efficiency and cost-effectiveness. “We’ve seen the trends and the flows that show ETFs becoming the preferred vehicle for a lot of clients,” says Barry.
For investors looking to diversify their holdings beyond U.S. borders, the TDI ETF offers a strategically positioned, actively managed option with a track record of adaptability and strong performance in various market conditions. Barry’s message to investors is clear: “International exposure is a really important part of a client’s portfolio, and being able to tap into a best-in-class institutional manager that manages the portfolio in a dynamic, adaptive way can be great for clients.”
The conversion of Touchstone’s fund into the TDI ETF, guided by the expertise of Los Angeles Capital Management, marks a significant evolution in the way investors can access global markets. With a focus on adaptability, cost efficiency, and a robust strategy rooted in current market realities, the TDI ETF stands as a compelling option for investors seeking to enhance their international exposure. As Barry aptly puts it, “The combination of tax efficiency, the ETF, and a really strong investment manager like LA Capital is something we’re very excited about.” For investors, TDI represents a strategic opportunity to harness the potential of global markets with a proven, dynamic approach.
_____________________
Additional Resources
______________________
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.
