How To Stick With International ETFs In 2016
Stocks have started the new year in volatile fashion. With multiple interest rate hikes expected from the Federal Reserve and this being an open presidential election year, investors should expect more market turbulence as 2016 moves along.
While that prospect increases the allure of safe-haven investments, such as gold and some safe-haven currencies, that does not mean investors should eschew equities altogether. Nor does it mean investors should focus solely on U.S. stocks. By emphasizing quality, investors can remain engaged with ex-U.S. developed markets.
The advantages of applying the quality factor to a dividend-based EAFE strategy are evident with the WisdomTree International Hedged Quality Dividend Growth Fund (NYSE: IHDG). IHDG tracks the WisdomTree International Hedged Quality Dividend Growth Index (WTIDGH). That currency-hedged benchmark “is comprised of the top 300 companies from the WisdomTree DEFA Index with the best combined rank of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets,” according to WisdomTree, the fifth-largest U.S. ETF issuer.
“The WisdomTree International Hedged Quality Dividend Growth Index was, on average, more than 20% under-weight to the Financials sector for 2015 compared to the MSCI EAFE Index, and the Financials that were included substantially outperformed those in the MSCI EAFE Index. This Index was also more than 3% under-weight to the Energy sector, which was a helpful under-weight,” said WisdomTree in a recent research note.
IHDG currently features no exposure to energy stocks. Rather, the ETF is a direct play on ex-U.S. developed markets consumers as staples and discretionary names combine for about 41 percent of the ETF's weight.
As its name implies, IHDG is a dividend ETF. Importantly, the ETF's distribution yield of just 1.41 percent implies ample room for dividend growth and is not close to realm of “high yield.” The U.K., Japan and Switzerland combine for about 48 percent of IHDG's weight. That is relevant for several reasons, including the fact that the U.K. is the second-largest developed market dividend destination after the U.S., Japanese dividends are rising thanks massive corporate cash stockpiles there and Switzerland has consistently been on Europe's steadiest dividend markets.
“There is no way to know what 2016 will bring in the way of performance, but, as we mentioned, some of the key drivers behind the WisdomTree International Hedged Quality Dividend Growth Index’s strong 2015 remain in place, and if markets do get volatile, historical analysis does in fact suggest that in tough markets the quality factor has the potential to outperform,” adds WisdomTree.
IHDG is up 3 percent over the past year compared to a 7 percent loss for the MSCI EAFE Index.
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