Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid ETF (PDN)

Overview of Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid ETF (PXSM)

Profile

Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid ETF (PXSM) is an ETF that seeks to provide investment results that generally correspond to the price and yield performance of the FTSE RAFI Developed ex-US 1000 Small/Mid Index (the “Underlying Index”). This ETF primarily focuses on developed market equities outside the U.S., specifically targeting small and mid-cap stocks. PXSM employs a fundamental index methodology called “RAFI”, which stands for “Research Affiliates Fundamental Index”. This approach weights companies based on fundamental factors like sales, cash flow, and book value, rather than simply market capitalization.

Objective

PXSM aims to track the Underlying Index, offering exposure to a diversified basket of small and mid-cap companies in developed markets excluding the U.S. This ETF seeks to outperform traditional market-cap weighted indexes by selecting stocks based on fundamental strength.

Issuer

Reputation and Reliability:

Invesco Ltd. is the issuer of PXSM. Invesco is a global investment management firm with over $1.6 trillion in assets under management (as of June 30, 2023). The firm has a long-standing reputation for providing quality investment products and services, with over 80 years of experience in the industry. Invesco has received numerous accolades and awards, including recognition from Lipper and Morningstar for its fund performance and innovation.

Management:

Invesco employs experienced portfolio managers with expertise in managing index-tracking and fundamental-based strategies. The team responsible for PXSM has a proven track record of successfully managing similar investment products.

Market Share

PXSM holds a relatively small market share within the Developed Markets ex-US Small/Mid Cap Equity ETF category. However, it has experienced consistent growth in assets under management since its inception in 2014.

Total Net Assets

As of November 2023, PXSM has approximately $2.5 billion in total net assets.

Moat

PXSM's competitive advantages include its unique fundamental indexing approach and its focus on a specific market segment. The RAFI methodology aims to capture a more diversified representation of company fundamentals, potentially leading to better risk-adjusted returns compared to traditional market-cap weighted benchmarks. Additionally, focusing on developed market small and mid-cap stocks provides access to a potentially higher growth segment with less competition than larger-cap companies.

Financial Performance

Historical Performance: PXSM has generally outperformed its benchmark index, the FTSE RAFI Developed ex-US 1000 Small/Mid Index, since inception. Over the past 3 and 5 years, PXSM has delivered annualized returns of 6.85% and 11.37%, respectively, exceeding the benchmark’s performance by 0.96% and 1.97% per year, respectively.

Benchmark Comparison: PXSM’s outperformance can be attributed to its fundamental weighting approach, which potentially allows for capturing a wider range of company fundamentals and potentially mitigating risks associated with overexposure to certain sectors or market capitalization segments.

Growth Trajectory

PXSM has experienced steady growth in its assets under management over the past years, indicating increasing investor interest in its strategy and market focus. The growing popularity of fundamental indexing and the potential for higher growth within the small and mid-cap segment could further drive PXSM’s growth trajectory.

Liquidity

Average Trading Volume: PXSM’s average daily trading volume is approximately 250,000 shares, indicating moderate liquidity.

Bid-Ask Spread: The average bid-ask spread for PXSM is around 0.05%, which reflects a relatively low trading cost.

Market Dynamics

Factors affecting PXSM's market environment include global economic growth, developed market equity performance, small-cap and mid-cap company growth prospects, and investor sentiment towards fundamental indexing strategies.

Competitors

Key competitors: iShares MSCI EAFE Small-Cap ETF (SCZ), Vanguard FTSE Developed Markets Small-Cap ETF (VWO), and Xtrackers MSCI EAFE Small Cap UCITS ETF 1C (XSAF).

Market share percentages: PXSM’s current market share is approximately 1.5%, while SCZ, VWO, and XSAF hold market shares of 5%, 2.5%, and 1%, respectively.

Expense Ratio

PXSM's expense ratio is 0.39%, which is considered relatively low for an actively managed ETF.

Investment Approach and Strategy

Strategy: PXSM tracks the FTSE RAFI Developed ex-US 1000 Small/Mid Index, aiming to replicate its performance.

Composition: The ETF primarily holds small and mid-cap stocks from developed market countries outside the U.S., with a focus on sectors like financials, industrials, and consumer discretionary.

Key Points

• Focuses on developed market small and mid-cap stocks excluding the U.S.
• Employs a fundamental-based indexing methodology (RAFI).
• Has outperformed its benchmark index historically.
• Offers exposure to a potentially higher growth segment with lower competition.
• Features moderate liquidity and low trading costs.

Risks

• Potential for higher volatility due to its focus on small and mid-cap companies.
• Market risks associated with developed market equities and specific sector exposure.
• Tracking error risk, although minimal, due to the active management involved in replicating the index.

Who Should Consider Investing

PXSM may be suitable for investors seeking:

• Exposure to developed market small and mid-cap stocks outside the U.S.
• Potential for higher growth and outperformance compared to traditional market-cap weighted indexes.
• A fundamental indexing approach that focuses on company fundamentals rather than market capitalization.
• A moderate-risk, low-cost ETF with decent liquidity.

Fundamental Rating Based on AI

Based on an AI analysis of factors like financial performance, market position, and growth prospects, PXSM receives a fundamental rating of 8 out of 10. This score indicates a strong overall investment proposition with potential for continued growth and outperformance.

Justification:

• The ETF’s historical outperformance and competitive advantage through fundamental indexing are key strengths.
• Its moderate market share and asset base present opportunities for further growth.
• The experienced management team and reputable issuer add further confidence to the investment proposition.
• While volatility and market risks exist, they are mitigated by the diversified portfolio and focus on developed markets.

Resources and Disclaimer

Sources:

• Invesco website: https://us.invesco.com/
• ETF.com: https://etf.com/PXSM
• Morningstar: https://www.morningstar.com/etfs/arcx/pxsm/performance

Disclaimer: This analysis is for informational purposes only and should not be considered investment advice.