If investors want to even out the volatility in the U.S. stock market by diversifying into international equities, they should consider a risk-aware approach, said speakers at “Upgrading Your Global ETF Equity Allocation Strategy,” a Monday panel discussion at the ETF Strategy Summit in Dallas.

By market capitalization, U.S. stocks make up approximately half of the investible public equity universe, said Joe Smith, senior market strategist at CLS Investments, but CLS tends to overweight international stocks.

“We’ve been fairly overweight towards international over U.S.,” said Smith. “Our benchmark internally for our equities sleeve is now 45 percent in the U.S., 55 percent international.”

Alex Piré, head of client portfolio management at Natixis affiliate Seeyond, explained that international investing looks differently depending on where an investor is domiciled. U.S. investors tend to have a larger concentration in the U.S., keeping about 60 percent of their portfolios focused on domestic stocks, with half of that U.S. allocation in large capitalization companies. The remaining 40 percent is typically split 50-50 between emerging and developed markets. Natixis’ European investors, on the other hand, tend to be more internationally focused and keep a smaller allocation to domestic stocks.

Seeyond is subadvisor for MVIN, the Natixis Seeyond International Minimum Volatility ETF, which uses a quantitative model to create an investment universe of international stocks with low volatility, then active management to select the best investments from a risk perspective, said Piré.

Both Smith and Piré argued that factors were a more effective method for thinking about international diversification than fundamentals, sector or geography.

“The way we’ve thought about building portfolios and managing risks has been along factor lines, where we want to harvest various risk premiums,” said Smith. “For us that’s a more important consideration than price.”

For one thing, sector classifications as defined in the U.S. do not easily translate to many global markets, said Piré.

Piré used Partners Group, a Switzerland-based company classified in the financial services sector, as an example. The bulk of Partners Group’s business involves buying concessions in toll roads and other infrastructure around the world. The company’s performance is not at all indicative of the Swiss market or Swiss financial services, he said.

“We tend to take for granted the precision of sectors in the U.S.,” said Piré. “We all understand that in the U.S. biotech companies, financial companies, technology companies can all be classified properly. When you go into developed markets and emerging markets, those classifications lose their ability to truly justify what a company’s doing.”

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