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Vident Financial's Quarter End Commentary (Q3)

Posted by Vident Financial on 11/5/20 4:16 PM

Vident Financial Q3 Review: Financial markets were mostly positive and volatile during the third quarter. Pandemic news along with the upcoming election created different versions of the future. The off and on-again fiscal stimulus talks along with the Federal Reserve responses added to the uncertainty.

Topics: US Equities, Principles-Based Investing, ETFs

Equity investors face two risks in this environment:

Overpaying for new economy companies that predict a winner take all outcome that doesn’t happen or buying into old economy companies at low valuations that turn into zombie companies. The news of fiscal stimulus and a vaccine lift older economy stocks and news of federal reserve stimulus and more COVID breakouts lift newer economy stocks. We believe our equity funds are finding good quality at good prices without concentrating the portfolio into either a new or old economy overweight. In our opinion, this is reflected this quarter with returns of our international and domestic equity funds in between those of the market cap and value indexes. Another asset class that is experiencing speculation about the future is real estate. Some real estate sectors have done well in this environment while others are pricing in major vacancies. We believe our real estate fund’s disciplined and diversified approach is the right positioning through this season.

Fund Review Highlights

Vident Core US Equity Fund (VUSE)

VUSE returned 5.04% as of for Q3 while the S&P 500 Index returned 8.8% and the S&P Mid-Cap Value 400 returned 3.1%. The major contribution to the underperformance to the S&P 500 Index was in the Information Technology and Consumer Staples sectors. In comparison, VUSE's portfolio factor exposures to both quality and value relative to other indexes are presented in the table. In our opinion, considering the uncertain future, having low debt and low risk to high priced companies may be good risk mitigators that may improve a portfolio’s probability of future success.

VUSEQ3Commentary-1VUSE PerformanceQ32020

Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. Short term performance is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Please visit our website www.videntfunds.com to obtain the most recent month-end returns.¹The ratio for valuing a company that measures its current share price relative to its per-share earnings. P/E ratios are used by investors and analysts to determine the relative value of a company's shares. ²This ratio is a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share. The ratio uses operating cash flow which adds back non-cash expenses such as depreciation and amortization to net income. ³The ratio is used to evaluate a company's financial leverage. It is a measure of the degree to which a company is financing its operations through debt versus wholly-owned funds. S&P 500 Index measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. The S&P 500 index is a capitalization-weighted index and the 10 largest companies in the index account for 26% of the market capitalization of the index. The Dow Jones S&P Mid-Cap 400 Value serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index. To be included in the index, a stock must have a total market capitalization that ranges from $2.4 billion to $8.2 billion at the time of addition to the index.

 

VIDIQ3DataVIDI PerformanceQ3

Vident International Equity Fund (VIDI)

VIDI returned 2.88% for Q3 while ACWI Ex USA (ACWX) Index returned 5.5% and the ACWI Ex USA Value Index returned 2.3%. The underperformance to ACWI Ex USA was 1.4% for country allocation, 1.4% for stock selection and 0.5% for currency depreciation to the dollar. More specifically, our underweight to China was the biggest detractor while our overweight to Thailand and Singapore were our biggest contributors to performance. Stock selection detractors were in Germany and Japan and contributors were stock selection in Australia and Singapore. Our underweight to the Euro and Yen were the biggest detractors on the currency. In our opinion, considering the uncertain future, having low debt and low risk to high priced companies may be good risk mitigators that may improve a portfolio’s probability of future success.

MSCI ACWI ex USA Index (ACWX) is a market-cap-weighted index, designed to provide a broad measure of global stock performance, with the exception of U.S.-based companies. ACWX includes both developed and emerging markets. MSCI ACWI ex USA Value Index captures large and mid cap securities exhibiting overall value style characteristics across 22 Developed and 26 Emerging Markets countries.

Vident Core U.S. Bond Strategy ETF

VBND returned 2.11% for Q3 while the Bloomberg Barclays US Agg (AGG) Index returned 0.6%. The overperformance to AGG was primarily in the corporate bond sector where VBND’s corporate bond returns were over 5% while the AGG corporate bond returns were around 1.5%. VBND rebalances every quarter partly based on the relative strength of spreads4 and momentum5 in the bond market. Changes in these trends are factored into the allocation between high yield6, TIPs7 and treasuries8.

VBNDperformanceQ3

Performance quoted represents past performance, which is no guarantee of future results. AGG is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. The index tracks IG corporate debt, government debt, mortgage-backed securities (MBS) and asset-backed securities (ABS) to simulate the universe of investable bonds that meet certain criteria.
 

PPTY - U.S. Diversified Real Estate ETF

PPTY returned -0.42% for Q3, compared to 1.36% for MSCI USA IMI Real Estate Index (MSCI). The two most important drivers of this return differential are: (1) PPTY’s higher allocation to office (17.0% vs MSCI 7.33%), which has continued to underperform due to COVID-19; and (2) MSCI higher allocation to specialized real estate – timberland and casinos were notably helpful to MSCI in Q3 2020. Listed real estate, i.e. PPTY’s portfolio, continued to trade at a significant discount to private real estate, so we remain confident in a correction that may well benefit PPTY.

PPTYPerformanceQ3Data-1

Performance quoted represents past performance, which is no guarantee of future results. The MSCI USA IMI Real Estate Index is designed to capture the large, mid and small cap segments of the US equity universe.

 


 

Disclosure:

Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. A prospectus can be obtained by visiting www.videntfunds.com/etfs or by calling 800-617-0004. Please read it carefully before investing.

Investments involve risk. Principal loss is possible. The Funds have the same risks as the underlying securities traded on the exchange throughout the day at market price. Redemptions are limited and often commissions are charged on each trade. Investments in foreign securities involve political, economic and currency risks, greater volatility and differences in accounting methods. These risks are greater for investments in emerging markets. A fund that concentrates its investments in the securities of a particular industry or geographic area may be more volatile than a fund that invests in a broader range of industries.

4A credit spread is the difference in yield between a U.S. Treasury bond and another debt security of the same maturity but different credit quality. 5Momentum is the rate of acceleration of a security's price or volume, the speed at which the price is changing. It refers to the rate of change on price movements for a particular asset and is usually defined as a rate. 6High-yield bonds are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. 7Treasury inflation-protected securities (TIPS) are a type of Treasury security issued by the U.S. government. TIPS are indexed to inflation in order to protect investors from a decline in the purchasing power of their money. 8Treasury bonds (T-bonds) are government debt securities issued by the U.S. Federal government that have maturities greater than 20 years.

The Vident Funds are distributed by ALPS Distributors, Inc. The fund's investment advisor is Vident Advisory, LLC. VIDI, VUSE, PPTY and VBND's sub-advisor is Vident Investment Advisory (VIA). Vident Financial owns the indexes that underlie the funds. ALPS is not affiliated with Vident Financial, Vident Advisory or VIA.

Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

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