Thanks to the changing dynamics in the world market, sponsors also need to look for some promising zones which are performing better with no sign of deterioration looming large on the horizon, even in the ongoing global economic doldrums. Such an idea is dividend investing in Europe and international markets.
Realizing the trend, WisdomTree rolled out two dividend ETFs – WisdomTree Europe Dividend Growth Fund – EUDG and WisdomTree International Hedged Dividend Growth Fund – IHDG on May 7, 2014. Investors should note that WisdomTree has already seen a great level of success in the dividend investing arena with products targeted at various markets like the U.S. and other developed nations, and it is no doubt looking for similar asset accumulation for the products described below:
EUDG in Focus
The product looks to follow the WisdomTree Europe Dividend Growth Index, a benchmark that consists of about 300 companies that have a market cap of at least $1 billion. These 300 stocks are screened on a combined basis of growth and quality factors in order to give a comprehensive approach to dividend investing.
Growth factors like long-term earnings growth expectations and quality factors like return on equity, and return on assets are the criteria looked upon while including the stocks to build up the index. Additionally, it is worth noting that the ETF is dividend weighted. Payout of no less than $5 million in cash dividends annually prior to the index screening will be considered for inclusion.
Currently the index is tilted toward the United Kingdom (25%), Switzerland (22%) and Germany (16%) while other nations like France, Norway, Sweden and the Netherlands also have their share. At the time of the Index’s annual rebalancing, no single stock could exceed the weight of about 5% of the basket while the cap for the sector is pegged at about 20%. The fund charges 58 bps in fees.
At present, blue-chip companies like Novartis AG (5.84%), Nestle SA (5.75%) and Roche Holding AG (4.25%) are the top three holdings of the ETF. About 35% of its assets go to the top-10 holdings.
Top sector of the fund is consumer staples (20.2%) (known for its defensive status), followed by healthcare (17%) and consumer discretionary (16%). Sector-wise the fund adopts a well-diversified approach (read: Hot Euro Zone ETFs for Summer).
IHDG in Focus
The new ETF follows the WisdomTree International Hedged Dividend Growth Index. This benchmark consists of about 300 companies that have a market cap of at least $1 billion. Here also, the stocks are screened based on the aforementioned growth and quality factors. The index includes companies paying cash dividends regularly. The fund charges 58 bps in fees.
Per the regulatory filing, the index is targeted at 15 developed European countries (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, or the United Kingdom) as well as Israel, Japan, Australia, New Zealand, Hong Kong or Singapore, though at present the index heavy on the United Kingdom (20.2%), Switzerland (16.2%) and Australia (15%).
Here also, consumer staples rule the fund with 20% exposure trailed by consumer discretionary (19.6%) and healthcare (16%). The companies including Roche Holding AG (5.8%), BHP Billiton Ltd (5.7%) and Nestle SA (5.21%) round out the top three spots of the ETF.
How does it fit in a portfolio?
Though rates are rising at a slower pace in the U.S. this year, investors are still skeptical about the prospect of rising interest rates once the Fed is done with its QE stimulus. In fact, the market by and large assumes short-term rates to rise in mid next year. This has marred the appeal for income investing in the U.S. to some extent.
Amid such a backdrop, international dividend investing especially in Europe can be a wise bet for yield-hungry investors as rates are still prevailing at rock-bottom levels in the continent. In some other international nations, rates are rising slowly and should reward investors with some decent yields.
On the other hand, the euro zone emerged out of recession last year, and though bumpy, the recovery is on track, inflating stock prices across the continent. Added to this, a spell of euro currency strength should provide dollar-denominated investors a solid return as well.
And if you are really worried about the sluggishness of Japanese currency, investors should note that WisdomTree had adopted a hedging technique in its international fund IHDG to safeguard investors’ return from currency risk (read: Is It Time To Buy The Hedged Currency ETFs?).
Moreover, significant exposure to defensive sectors like consumer staples and healthcare will ensure that the funds are less ruffled by any sudden economic uncertainty. Finally, given the attention on earnings growth, ROA and ROE, it could result in a more growth-oriented dividend portfolio as opposed to several other dividend funds which mainly revolve around value factors.
Focus on dividends in the European space is definitely not a novel idea as the space already has some ultra-popular ETFs like FTSE Europe ETF (VGK) offering 3.76% in yield and some moderate assets players like STOXX European Select Dividend Index Fund (FDD) and SPDR DJ STOXX 50 ETF (FEU) yielding about 3.59% and 5.02% annually. However, the highest yield paid by any European ETF is at present is 6.7%, and that too is from WisdomTree, the — WisdomTree United Kingdom Hedged Equity Fund (DXPS).
We don’t expect the new European launch to face severe hurdles in garnering investors’ assets though, as the funds targets both dividend and growth characteristics – a bit of unusual combo in the income investing sphere.
In the broader foreign land, the fund has to contend with the likes of SPDR S&P International Dividend ETF (DWX) and iShares International Select Dividend ETF (IDV). The two yield around 6.37% and 4.61% but do not hedge against currencies. Thus, IHDG should get an edge over many high-yield existing candidates as currency hedging strategy adopted by IHDG appears to be a good plan in the current market.
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