International stocks, both of the developed and emerging markets varieties, are disappointing this year. The MSCI EAFE Index and the MSCI Emerging Markets Index, two of the most widely followed gauges of ex-U.S. equities, are both in the red while the S&P 500 is up about 7 percent.
Some international dividend strategies have been slightly better. The Vanguard International Dividend Appreciation ETF VIGI is modestly higher on a year-to-date basis. VIGI holds developed and emerging markets stocks.
What To Know
VIGI, which debuted in the first quarter of 2016, tracks the NASDAQ International Dividend Achievers Select Index. Since coming to market, the Vanguard fund is up 33.4 percent, including dividends paid.
“This low-cost fund prioritizes dividend growth over yield, which emphasizes highly profitable firms that should hold up better than most during market downturns and offer attractive long-term returns,” said Morningstar in a recent research note.
While VIGI isn't a particularly old exchange traded fund, it has proven adept at attracting investors' attention. At the end of the second quarter, the fund had $915.5 million in assets under management, a solid total for an ETF that is just over two years old.
Why It's Important
Over the years, some international dividend ETFs gained traction with investors due in part to international dividend payers often boasting higher yields than their U.S. counterparts. However, there are flaws with yield-based strategies, of which VIGI isn't one. VIGI member firms must have minimum dividend increase streaks of seven years.
VIGI “then applies additional filters to eliminate stocks that may not be able to sustain their dividend growth,” said Morningstar. “The portfolio weights its holdings by market capitalization to help mitigate turnover and trading costs. Individual stocks are limited to 4% of the portfolio at the annual rebalance to improve diversification.”
About 15 countries in VIGI receive weights of 1 percent or more and over three-quarters of the fund's geographic exposure is split among developing economies and Europe.
The strategy of including developed and emerging markets stocks under one umbrella while excluding domestic equities is similar to the MSCI ACWI ex USA Index, but VIGI has outperformed that benchmark while being less volatile since inception.
What's Next
VIGI eschewing a yield focus is a benefit for investors.
“This fund’s focus on dividend growth makes it significantly different from those that emphasize dividend yield,” said Morningstar. “A narrow focus on yield brings about certain risks because high yields can be an indicator of firms that may be in financial distress or have poor forward-looking prospects.”
Morningstar has a Bronze rating on VIGI.
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