IXUS - IXUS: A Case For Longer-Term Positioning But Questionable Now

2023-10-25 13:35:06 ET

Summary

• iShares Core MSCI Total International Stock ETF offers diversification with global equities outside the US.
• IXUS tracks the MSCI ACWI ex USA IMI index, providing exposure to large-cap, mid-cap, and small-cap non-US equities.
• The ETF has a highly diversified portfolio with over 4,000 stocks, but caution is advised due to potential risks in the current global economic backdrop.

Few people think more than two or three times a year; I have made an international reputation for myself by thinking once or twice a week. - George Bernard Shaw

The iShares Core MSCI Total International Stock ETF ( IXUS ) is a popular choice among investors looking to diversify their portfolio with a wide range of global equities. It offers exposure to a broad spectrum of stocks outside the United States, making it an attractive option for those seeking international diversification. I've talked about the case for investing in non-US equities from a long-term cycle perspective, and this is a good fund for that, but I worry about the more short-to-intermediate term for equities in general.

Understanding IXUS

IXUS, managed by BlackRock Fund Advisors, is designed to track the investments of the MSCI ACWI ex USA IMI. This index encompasses large-cap, mid-cap, and small-cap non-U.S. equities, providing a comprehensive view of developed and emerging market performance, excluding the United States. The ETF has a highly diversified portfolio with more than 4,000 stocks, with financials, industrials, consumer discretionary, and IT sectors representing the majority of its investments.

It's important to note the sector composition is skewed towards value sectors, like Financials and Industrials, and nowhere near has as much Technology exposure as US markets. This matters as I believe Technology is overvalued and likely very vulnerable. The problem here is Financials, which, if you haven't noticed, are showing some nasty price action lately globally on what I believe is the credit event we are now in.

As to holdings, the ETF's top individual positions include:

1. Taiwan Semiconductor Manufacturing Company Limited (TSM): TSM is the world's largest dedicated independent semiconductor foundry, providing integrated circuits and nanotechnology.
2. Nestle S.A. (NSRGY): Nestle is a Swiss multinational food and drink processing conglomerate, known for its wide range of products from baby food and medical nutrition to bottled water and pet food.
3. Tencent Holdings Ltd. (TCEHY): Tencent is a Chinese multinational technology conglomerate holding company, renowned for its various internet-related services and products, entertainment, artificial intelligence, and technology both in China and globally.

Note that these represent just around 1% each of the fund. So while they are top positions, they won't move the fund that much. This is a highly highly diversified international fund.

Peer Comparison

When comparing IXUS with similar ETFs, one can observe some similarities and differences. For instance, the Vanguard Total International Stock ETF ( VXUS ) also provides broad exposure to both developed and emerging non-US stock markets. IXUS, when looking at the price ratio relative to VXUS, is near the lows but it's a fairly tight range so I would expect the two funds to perform roughly the same on average.

The Case for Caution

While international investing offers many potential benefits, it's also crucial to be aware of the risks. The current global economic backdrop, marked by inflation concerns and geopolitical tensions, calls for caution. Any credit event can have a ripple effect on all stocks globally, making the environment less conducive for new allocations. In the case of IXUS, despite its diverse portfolio and attractive long-term prospects, the ETF is exposed to sectors like financials and industrials that could be vulnerable in a credit downturn.

This is a good fund and has a number of real positives. While international diversification hasn't helped against a US-dominated equity landscape, the longer-term case I believe is there as momentum shifts. Just be mindful of timing as this could be a very high-risk juncture for all risk assets in the short term.

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