Touchstone Dynamic International ETF (TDI)

The Touchstone Dynamic International ETF (NASDAQ: TDI) takes a middle path between passive indexing and completely discretionary active management. It buys stocks from countries outside North America—wealthy, stable nations like Japan and Germany alongside faster-growing but riskier economies like India and Mexico. A Touchstone portfolio team decides which stocks to hold, but their decisions are constrained by rules. The fund uses quantitative screens based on value (stocks that appear cheap) and momentum (stocks with upward price trends) to rank candidates, then constructs a portfolio tilted toward the most attractive opportunities according to those criteria. The result is a disciplined, process-driven approach that offers flexibility without requiring a manager to operate on pure conviction.

The world outside North America

TDI invests in stocks from two very different sets of countries. Developed markets—the United Kingdom, France, Germany, Japan, Australia—are politically stable, economically mature, and home to world-leading companies. They grow slowly but dependably. Emerging markets—India, Brazil, Mexico, South Africa, Turkey—offer faster growth but more volatility, currency risk, and political uncertainty. Companies in these regions may face sudden policy changes, banking disruptions, or geopolitical shocks that developed-market investors rarely encounter.

Most international funds maintain a fixed split between developed and emerging exposure. TDI does not. Instead, Touchstone’s quantitative process continuously reassesses valuations and opportunities in both segments. When emerging-market stocks trade at attractive prices and show positive momentum, TDI holds more of them. When developed markets look cheaper, allocation shifts that way. This dynamic flexibility is a key advantage of active management—a passive index would mechanically hold the same proportions regardless of relative opportunity.

The value-and-momentum framework

Touchstone’s selection process rests on two factors that academic researchers have studied for decades. Value stocks trade at low prices relative to earnings, book value, or cash flow—the assumption being that the market has mispriced them and they will eventually return to fair value. Momentum stocks have shown strong recent price trends—the assumption being that upward trends tend to persist in the near term.

The fund applies mechanical screens to rank international stocks on these dimensions. A company trading at a low price-to-earnings ratio scores high on value. A company that has gained 20% over the past year scores high on momentum. Touchstone combines these scores into a portfolio that is tilted toward stocks ranking high on one or both factors. The result is not a tiny portfolio of extreme bets. Instead, it is a diversified basket of 50 to 100 companies that, collectively, lean toward value and momentum opportunities.

The strength of this approach is discipline. Touchstone cannot cherry-pick stocks on hunches or move in and out of emerging markets on emotion. The process forces consistency. The weakness is that value and momentum strategies do not always work. For extended periods, growth stocks outperform cheap stocks, and momentum crashes as trends reverse. When that happens, TDI underperforms broad international indexes despite the team’s discipline.

The price of active management

Managing a fund with this much process and trading requires staff—analysts, portfolio managers, trading desks, compliance, infrastructure. These costs appear in TDI’s expense ratio, which is higher than a passive international index fund charges. The implicit pitch is that Touchstone’s value-and-momentum selection adds enough outperformance to cover that extra fee and leave investors better off.

Whether this works out depends on market cycles, the quality of Touchstone’s execution, and luck. Some years TDI’s factor tilts add value; other years they subtract value. Over many years, the question is whether the average outperformance exceeds the cost. Investors considering TDI should examine the fund’s multi-year performance relative to comparable passive international benchmarks and decide whether the track record justifies the higher fee.

Taxes and turnover in non-retirement accounts

Active management creates portfolio turnover. As valuations shift and stocks move in and out of favor on the screens, Touchstone buys and sells positions. This trading generates capital gains. For investors holding TDI in a regular taxable brokerage account, these gains are taxable each year. A passive index fund, which trades much less, creates fewer taxable events and allows investors to defer taxes until they sell the fund itself.

This tax drag is real and material, especially over long holding periods. If you own TDI in an IRA or 401(k), taxes are sheltered and this concern vanishes. If you own it in a taxable account, you should budget for capital-gains distributions and account for their tax cost when comparing TDI to passive alternatives.

Currency risk without hedging

Every stock in TDI is priced and traded in a foreign currency—euros, yen, pounds sterling, Indian rupees, Brazilian reais, and many others. When the US dollar weakens globally, these foreign earnings become more valuable in dollar terms, helping US investors. When the dollar strengthens, foreign holdings shrink in value. TDI does not hedge currency exposure; investors bear the full effect of foreign-exchange moves on top of the companies’ operating performance.

This two-part volatility—company-specific returns plus currency moves—makes TDI more volatile than a US-only fund. Currency swings can easily exceed stock-selection performance, adding or subtracting several percentage points from annual returns. This is not a flaw in the fund; it is an inherent feature of international investing. But investors should understand that some of TDI’s returns, positive or negative, will reflect currency moves rather than the quality of Touchstone’s stock-picking.

Liquidity, trading, and logistics

TDI itself trades on NASDAQ with reasonable volume and tight bid-ask spreads. Buying or selling shares is straightforward. The underlying stocks, however, trade on exchanges scattered across the world—London, Frankfurt, Tokyo, emerging-market bourses. Some of these markets are deep and liquid; others are thin. Touchstone has the infrastructure to handle global trading, but international trading introduces operational complexity and potential slippage that a purely domestic fund avoids.

How to evaluate TDI

Start with Touchstone’s fund prospectus and fact sheet, which explain the selection process, show current holdings, and detail the fund’s recent geographic and factor allocation. Examine TDI’s performance over multiple time periods—three, five, ten years if available—against a blend of a developed-market index and an emerging-market index. This comparison shows whether active management and factor tilting add value or lag after fees. Understanding which specific metrics Touchstone uses for value and momentum, and how the fund rebalances, will clarify whether the process aligns with your own investment philosophy. Finally, if you hold TDI in a taxable account, track the fund’s capital-gains distributions and factor that tax cost into your total-return calculations.