IVSX targets international small and mid-cap companies that Applied Finance's proprietary valuation model identifies as undervalued relative to their intrinsic worth. The fund offers exposure to developed market companies outside the US that institutional investors often overlook due to size constraints.
How It Works
The ETF uses Applied Finance's Intrinsic Value Strategy (IVS) methodology, which calculates company valuations based on economic profit metrics rather than traditional accounting measures. The model screens for firms generating returns above their cost of capital while trading below intrinsic value. Holdings are weighted by a combination of valuation discount and quality scores, with quarterly rebalancing to capture valuation changes.
Key Features
- Economic profit-based valuation model that ignores accounting distortions common in international markets
- SMID cap focus captures companies too small for most international funds but large enough for liquidity
- Active-like stock selection through systematic rules at passive-like fees
Risks
- Small/mid-cap international stocks can drop 40-50% in global selloffs with limited liquidity to exit
- Currency movements can add or subtract 10-15% annually independent of stock performance
- Concentrated value approach may underperform growth-oriented benchmarks for multiple years
Who Should Own This
Best suited for investors seeking international diversification beyond large-cap dominated EAFE funds who can tolerate higher volatility. Works as a 5-10% satellite holding for those who believe market inefficiencies are more pronounced in less-covered international small caps. Requires patience as value strategies can lag during momentum-driven markets.