As U.S. equity markets potentially teeter on the edge, some investors are seeking greater international exposure through dividend ETFs. However, investors or their financial advisors need to understand what their ETF holds and the international attributes the fund follows.
There are international dividend ETFs that provide higher yields, but also capture more of the potential downside as shown by a higher beta and higher downside capture ratios. Less risky international dividend ETFs usually provide smaller yields. Some ETFs invest upwards of 36 cents of every $1.00 in U.S. stocks, diluting the overall exposure to foreign-based companies, and others have no U.S. exposure. Since a great many of the 50 or so international dividend ETFs are relatively new, comparing dividend growth may be irrelevant as long-term comparisons would be difficult to ascertain.
Morningstar recapped the international dividend investment thesis quite succinctly in a recent SA article found here:
The rationale behind domestic dividend investing applies to foreign equity. Studies show that a strong dividend payout ratio is correlated with higher earnings growth and solid fundamentals. By paying out dividends to investors, managers are forced to use cash responsibly and efficiently instead of going on a buying spree. The opposing view states that holding back cash means managers see opportunities to reinvest in the company to grow future earnings, but the data show that dividend payers outperform nonpaying firms almost all of the time.
Below are a few international dividend ETF investments for consideration, as described by the website Global Fund Data:
PowerShares International Dividend Achievers (NYSEARCA:PID)
The investment seeks results that generally correspond (before fees and expenses) to the price and yield of the International Dividend AchieversTM Index. The fund generally will invest at least 90% of total assets in the securities that comprise the International Dividend AchieversTM Index. The index currently is composed of GDRs and ADRs that are listed on the LSE, in addition to ADRs and non-U.S. common or ordinary stocks traded on the NYSE, the NASDAQ or NYSE Amex of companies that have increased their aggregate annual regular dividend payments consistently over the course of the last five calendar or fiscal years. More information can be found here.
WisdomTree DEFA (NYSEARCA:DWM)
The investment seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Dividend Index of Europe, Far East Asia and Australasia (the "WisdomTree DEFA Index"). The fund employs a "passive management" - or indexing - investment approach designed to track the performance of the WisdomTree DEFA Index. It attempts to invest all, or substantially all, of its assets in the common stocks that make up the index. The index is a fundamentally weighted Index that is comprised of dividend-paying companies in the industrialized world, excluding Canada and the United States, that pay regular cash dividends. The fund is non-diversified. More information can be found here.
SPDR S&P International Dividend (NYSEARCA:DWX)
The investment seeks results that, before fees and expenses, correspond generally to the total return performance of an index.
The fund employs a sampling strategy in seeking to track the performance of the S&P International Dividend Opportunities® Index. It invests substantially all, but at least 80%, of its total assets in the securities comprising the index or in ADRs or GDRs based on securities comprising the index. The index is designed to measure the performance of the approximate 100 highest dividend-yielding common stocks and ADRs listed in primary exchanges of countries included in the S&P Global BMI. The fund is non-diversified. More information can be found here.
Global X SuperDividend ETF (NYSEARCA:SDIV)
The investment seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global SuperDividendTM Index. The fund invests at least 80% of its total assets in the securities of the underlying index and in ADRs and GDRs based on the securities in the underlying index. The underlying index tracks the performance of 100 equally weighted companies that rank among the highest dividend yielding equity securities in the world, as defined by Structured Solutions AG. It generally will use a replication strategy. The fund is non-diversified. More information can be found here.
iShares STOXX Global Select Dividend 100 (ISPA.DE)
The investment seeks to track the price and yield performance, before fees and expense, of the STOXX Global Select Dividend 100 TR EUR Index.
The index offers investors the ideal tool to track high-dividend-yielding companies in the STOXX Global 1800 index. It combines the highest-yielding stocks from these three regions with 40 components for the Americas and 30 components each for Europe and Asia/Pacific. More information can be found here.
ISPA is a foreign traded ETF on the Frankfurt exchange and investors should check with their brokers as to availability and ease of trading. Dividends are paid in Euros. Investors looking for more information on ISPA should review their fact sheet here.
There are also a variety of Emerging Market ETFs with dividends above 3.0%, such as WisdomTree's offering (NYSEARCA:DEM). From Morningstar overview on DEM:
WisdomTree Emerging Markets Equity Income is a solid choice for passive, emerging-markets equity exposure and is suitable as a small core holding. DEM holds over 200 high-yielding emerging-markets stocks, weighted by their aggregate annual cash dividends paid, which results in a portfolio fairly different from that of a cap-weighted emerging-markets fund.
It becomes obvious the underlying index differs for each ETF manager and the stocks held in the portfolios should also differ widely. Much like researching and buying mutual funds, investors should appreciate the investment philosophy of the ETF and where the managers invest their money.
Below is a table outlining the criteria and performance of these international dividend ETFs. The beta and alpha calculations are based on the international equity MSCI EAFE Index. The source is Morningstar.com:
Beta - 3-yr
Beta - 5-yr
Alpha - 3-yr
Alpha - 5-yr
Upside Capture 5-yr
Downside Capture 5-yr
Reviewing price history charts is an interesting task as well, since some of these ETFs do not have a long history of performance. The following chart compares the 3-yr performance of these international dividend ETFs and the international index ETF iShares MSCI EAFE Index (NYSEARCA:EFA) and the US S&P 500 ETF (NYSEARCA:SPY). What becomes evident is the underperformance of the international markets compared to the U.S. over the past 3 and 5 years. These ETFs underperformed price-wise by between 14% and 40%.
3-Year Price Only
5-Year Price Only
While international dividend ETFs have underperformed the S&P 500, even considering income generated or total returns, contrarian thinkers may find them attractive. As bond pricing begins to go against the grain from increases in interest rates and if the overpriced U.S. markets begin a correction, international dividend ETFs may regain their favor. However, it will be crucial for investors to fully understand the portfolio contained within their selection. It is important to go to their respective websites and review the top 20 holdings.
I am giving serious consideration to ISPA due to its higher yield, equal diversification among developed markets, low beta, low downside capture ratio, and positive alpha.
Additional disclosure: I am considering buying ISPA.DE. Note: Please review important disclaimer in author's profile.