Market Overview

Take The Dividends, Leave The Banks With This ETF: International Edition


Financial services stocks are off to a dismal start in 2016. That much is highlighted by a 12 percent year-to-date slide for the Financial Select Sector SPDR (NYSE: XLF), but the carnage is not limited to U.S. financials. For example, the iShares MSCI Europe Financials ETF (NASDAQ: EUFN) is down nearly 17 percent.

A flattening yield curve and diminishing expectations that the Federal Reserve will be able to raise interest rates multiple times this year are among the factors dragging on U.S. bank stocks and the relevant exchange-traded funds.

If higher interest rates really are efficacious for bank stocks, then it is not surprising that European banks are being pinched. After all, the eurozone is home to negative interest rates. So is Switzerland. Nordic countries have employed negative rates as well; just look at Denmark and Sweden.

Although the financial services sector has delivered some solid dividend in the years since the financial crisis, there are ways for income investors to generate equity income while ditching bank stocks. That exercise can be performed on an international level with the WisdomTree International Dividend ex-Financials Fund (NYSE: DOO).

Just DOO It

Avoiding financials when the sector is swooning is proving advantageous for DOO. Sure, the ETF is down four percent year-to-date, but that loss is just half as bad as the tumble endured by the widely followed MSCI EAFE Index.

Particularly in the developed world, large banks and other financial institutions are often at the mercy of their respective central banks. At a time when negative interest rates are all the rage, DOO's allure could be on the rise.

“Unfortunately, while many of these programs may represent steps in the right direction, banking (particularly in Europe) remains extremely complex. Additionally, while efforts have been made to apply a singular set of rules and standards, a large degree of variation exists among banks of different sizes and geographies. Therefore, during times of market stress, the worst is assumed until rumors can be thoroughly disproven. To start 2016, new 'bail-in' provisions have been put into effect in the eurozone. Under these measures, private sector creditors will be forced to absorb losses during bank failures before government funds are made available. While these policies may serve as an important step in limiting 'too big to fail,' some questions remain about their operations during periods of crisis,” said WisdomTree in a recent note.

DOO, which has a distribution yield of 3.12 percent, is home to stocks from some of the more dependable ex-U.S. Dividend growth markets, including the U.K., Switzerland and Australia. Those markets combine for over 42 percent of the ETF's weight. Though Australian and U.K. dividend growth is seen as vulnerable this year, DOO devotes just over 21 percent of its weight to the energy and materials sector, the problem areas for Australian and U.K. dividends.

The utilities and telecom sectors, groups that should benefit from lower interest rates, combine for over 29 percent of DOO's weight.

Posted-In: Long Ideas Dividends Specialty ETFs Eurozone Markets Trading Ideas ETFs


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