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A Protective ETF Play On International Dividend Growth

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A Protective ETF Play On International Dividend Growth
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International stocks and exchange traded funds are not repeating the impressive performance seen in 2017. The widely followed MSCI EAFE Index is lower by 6.5 percent in 2018 and close to violating its 52-week low.

Some other ex-U.S. developed markets strategies are proving more durable or less weak. For instance, the WisdomTree International Hedged Quality Dividend Growth Fund (NYSE: IHDG) is down just 0.88 percent this year.

What Happened

As its name indicates, the WisdomTree International Hedged Quality Dividend Growth Fund is a currency hedged ETF, meaning it can benefit as the U.S. dollar rises. And that is what the greenback is doing this year, as highlighted by a year-to-date gain of over 5 percent for the U.S. Dollar Index.

IHDG's underlying index “utilitizes an annual screen on fundamental metrics, including dividend payout ratios, return on equity, return on assets and long-term estimated earnings growth in selecting 300 dividend-paying companies,” said WisdomTree.

Since that index was conceived four-and-a-half years ago, it has routinely outperformed the MSCI EAFE Index with less volatility.

Why It's Important

At the geographic level, there are similarities between IHDG and the MSCI EAFE Index. For example, Japan and the U.K., in that order, combine for almost 42 percent of the MSCI benchmark. The two countries represent nearly 38 percent of IHDG. There are other geographic overlaps, but IHDG's emphasis on ROE sets it apart.

“The WisdomTree Index has 64.49 percent allocated to the top ROE quintile versus just 22.51 percent for the market cap-weighted index, a differential of nearly three times,” said WisdomTree. “This higher allocation was the primary driver of outperformance (1.14 percent of the 2.21 percent).”

IHDG's underlying index yields 2.59 percent, which is in-line with that of MSCI EAFE Index. Earnings multiples on the two indexes are also comparable.

What's Next

IHDG's sector allocations are also meaningful.

“In addition to differentiated exposures to fundamentals such as ROE, sector and country attributions help drill into another way to analyze exposures and returns. The sector exposure has tended to be more heavily weighted in the consumer sectors and health care, and significantly less in financials,”

IHDG allocates over 56 percent of its combined weight to consumer discretionary, industrial and health care names. Those sectors combine for just 37 percent of the MSCI EAFE Index.

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