ETFs that focus on non-U.S. developed markets

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Assuming the world doesn’t end anytime soon, long-term investors could see some good values around the globe — specifically from dividend-focused ETFs that own stocks primarily from developed markets outside the United States.

Investors in non-U.S. stocks lost ground over 2018 as the MSCI EAFE (Europe, Australasia and Far East) index fell 16.14% against a 6.24% drop in the S&P 500. Reasons for the decline are numerous, including the ever-worsening Brexit situation, potential trade wars and rising interest rates combined with an explosion of debt over the past decade.

There are more than 20 dividend-focused ETFs that own stocks primarily from developed markets outside the U.S.

But despite all the negatives, there is good news. Global GDP grew from $18.7 trillion in 1965 to $108.1 trillion in 2015. In 1970, more than 60% of the world’s population lived in extreme poverty; in 2015, it was about 9.6%.

There are more than 20 dividend-focused ETFs that own stocks primarily from developed markets outside the U.S. To make our list more manageable, I’ve eliminated those that concentrate on a particular cap size and limited the selection to ETFs that have been around for at least a decade.

Each of these ETFs uses a form of dividend weighting, so they have a value tilt. All performance numbers are through Jan. 11.

Invesco International Dividend Achievers (PID, expense ratio: 0.55%) holds 61 foreign stocks that have increased their dividends in each of the past five years. The most concentrated of the ETFs we are looking at, PID has produced decent annualized returns for the three- and 10-year periods and virtually unchanged annualized results for the five-year span. For the last 12 months, PID had a total return of -8.18%. Because of the way it is structured, PID does not closely fit the EAFE country model. The ETF’s largest concentrations are in Canada (41.17%), the U.K. (24.25%), and Russia (7.17%). Of the three, only the U.K. is an EAFE constituent. PID’s sector emphasis is in energy (17.58%), financials (15.80%), and communications services (15.62%). Morningstar expects the forward yield to be 5.43%.

iShares International Select Dividend (IDV, 0.50%) holds 100 higher yielding foreign stocks and includes Canada (6.34% of the fund), which EAFE does not. IDV’s top country weightings are the U.K. (24.33%), Australia (16.32%), and France (8.66%). Financials (31%), utilities (12.63%), and communications (11.91%) are the dominant sectors. Over the most recent 10-year period, IDV had the best-annualized total return (9.40%) of our three ETFs. For the 12 months, IDV had a return of -8.30%. As you might expect from an ETF that seeks higher payments, the forward yield on IDV is 6.25% by Morningstar’s reckoning.

WisdomTree International Equity (DWM, 0.48%) holds the most stocks of the three ETFs considered here. With 852 holdings it is close to the 920 constituents of EAFE. DWM’s top three country allocations also line up with EAFE’s, though at different concentrations: DWM has 17.71% of its portfolio in Japan vs. EAFE’s 24.61%. In the United Kingdom, it also has 17.71%, slightly higher than the benchmark’s 16.94%. For France, DWM’s 10.53% allocation is a hair off EAFE’s 11.11%. Major holdings are in banks (12.97%), telecommunications services (8.22%), and energy (8.09%). For the past 12 months, DWM had a total return of -12.68%, but showed positive annualized returns for the three-, five-, and 10-year spans. Morningstar projects DWM’s year-ahead dividend yield at 4.53%.

Note that all three of these ETFs beat EAFE over the three-, five-, and 10-year periods ended January 11. Dividend investors seeking a closer match with EAFE might be attracted to DWM, while those who want growing dividends might be attracted to PID. Buyers looking for higher yield, however, might consider IDV.

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