Weakness in Vident International Equity Strategy ETF's People and Process Pillar ratings limits this strategy to a Morningstar Medalist Rating of Negative. The portfolio maintains a sizable cost advantage over competitors, priced within the least expensive fee quintile among peers.  

 The team managing the passive strategy earns a Below Average People Pillar. The strategy gets a Below Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a substantial overweight position in quality exposure and volatility exposure compared with category peers. A high quality exposure means holding stocks that are consistently profitable, growing, and have solid balance sheets. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. The strategy's parent organization doesn't stand out, earning the firm an Average Parent Pillar rating. It has displayed a handful of investor-friendly attributes including overall reasonable fees and a competitive average Morningstar Rating.

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Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. Vident International Equity Strategy ETF earns a Below Average Process Pillar rating. 

The process is strengthened by tracking an index. Historical data, such as Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. However, the rating is weakened by the fund's weak long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category average, which suggests that the process has struggled over that period. The parent firm's five-year retention rate of 71% also holds the rating back.

 This strategy skews toward smaller, more value-oriented companies than its average peer in the Foreign Large Value Morningstar Category. Analyzing additional factors, this strategy has consistently favored high-quality stocks, including those with low financial leverage and solid returns on equity, compared with Morningstar Category peers during recent years. Though it may trail peers during an economic boom, this orientation contributes to helping it weather periods of economic stress better. In recent months, the strategy was more exposed to the Quality factor compared with its Morningstar Category peers as well. This strategy also has had an overweight bias to the volatility factor over these years, meaning it has owned companies that have a higher historical standard deviation of returns. This contributes to a higher-risk, higher-reward approach. Compared with category peers, the strategy also had more exposure to the Volatility factor in the most recent month. Additionally, this strategy has demonstrated a preference for high-momentum stocks in these years. Momentum is based on the premise that stocks that have recently outperformed will continue to outperform, and those that have underperformed will stay behind. In this month, the strategy also had more exposure to the Momentum factor over its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section. 

 The portfolio is overweight in consumer cyclical and technology relative to the category average by 3.1 and 2.6 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and healthcare, with financial services underweighting the average portfolio by 3.0 percentage points of assets and healthcare similar to the average. The portfolio is positioned across 248 holdings and its assets are more dispersed than the typical peer in the category. In the most recent disclosure, 6.0% of the strategy's assets were concentrated in the top 10 fund holdings, as opposed to the category average's 13.9%.

Below Average

Process

Vident Financial’s team earns a Below Average People Pillar rating. The team benefits from the strategy's costs, which rank in its category's least expensive quintile. A higher expense ratio reduces net returns, so low costs give this team an advantage. However, the rating is held back by the turnover of talent across its parent firm. The firm's asset-weighted manager tenure of seven years suggests it could do more to retain portfolio managers. The combined average three-year excess return of each manager also detracts from the team. It suggests that the funds they manage have lagged their respective category's average return.

People

Vident Financial has some investor-friendly attributes, but other attributes warrant caution, leading to an Average Parent Pillar rating. A strength of Vident Financial is that its product shelf of open-end and exchange-traded funds is, on average, offered at a minimal cost, suggesting that it considers what's best for its investor base. On average, fees for funds are in the cheapest quintile of respective category peers. Vident Financial's risk-adjusted performance compares similarly to competitors. Across its open-end and exchange-traded funds, the firm’s average five-year Morningstar Rating is 3.3 stars, which is about standard. Average asset-weighted tenure of seven years among the longest-tenured managers at Vident Financial is on par with peer firms. In isolation, seasoned teams tend to have more experience to draw upon should they need to weather turbulent market conditions.

Average

Parent

Vident International Equity Fund

VIDI tracks an index of companies from both developed and emerging markets, ex-US. The fund selects and weights its constituents in a tiered structure based on various risk and fundamental measures.

Launched on 10/29/2013, the Vident International Equity Strategy ETF (VIDI) is a smart beta exchange traded fund offering broad exposure to the World ETFs category of the market.

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