International equities, both developed and emerging, have long frustrated investors. Consider the following: During the six years spanning 2018 through 2023, the MSCI ACWI ex USA IMI Index, which includes both developed and emerging markets equities, beat the S&P 500 on just one occasion – 2022 when U.S. markets were punished by rising interest rates.
Truth is, the laggard status of international stocks against their U.S. counterparts extends beyond those six years, meaning advisors and investors have had little reason to embrace the asset class simply in the name of portfolio diversification. Not when U.S. benchmarks, such as the Nasdaq-100 (NDX), have been delivering stellar performances.
Still, there is allure and potential with ex-U.S. equities and the case for related exposures is partially supported by dividends. Many markets outside the U.S., particularly those of the developed varietal, sport dividend yields in excess of the S&P 500 and some offer comparable or superior rates of payout growth. In many cases, dividends are indicative of low volatility and quality – factors investors often find compelling.
With those points in mind, market participants might want to consider the following international equity income exchange traded funds.
KraneShares S&P Pan Asia Dividend Aristocrats Index ETF (KDIV)
The KraneShares S&P Pan Asia Dividend Aristocrats Index ETF (KDIV) is less than two years old, making it one of the newer kids on the international dividend ETF block. Youth aside, KDIV is an interesting option because it combines access to developed and emerging economies in the Asia-Pacific region.
The ETF tracks the S&P Pan Asia Dividend Aristocrats Index, which mandates that member firms have solid track records of increasing payouts. Last year, KDIV’s index beat the S&P Pan Asia BMI. While past performance isn’t a guarantee of future returns, beating the S&P Pan Asia BMI is old hat for KDIV’s index.
“Going back to Dec. 31, 2001, the S&P Pan Asia Dividend Aristocrats has outperformed the S&P Pan Asia BMI on average by 2.35% annually,” according to S&P Dow Jones Indices. "Additionally, this long-term outperformance has been achieved while also delivering a lower full-period volatility, maximum drawdown and downside capture ratio."
ALPS O’Shares Europe Quality Dividend ETF (OEUR)
European stocks have been primary drivers of investors’ frustration with ex-U.S. developed markets benchmarks do in large part to Europe lacking significant tech exposure and being heavy on value stocks. Interestingly, attitudes toward European stocks could be shifting, potentially signaling opportunity with the ALPS O’Shares Europe Quality Dividend ETF (OEUR).
Over the past year, OEUR has been a better than a host of non-dividend-dedicated Europe ETFs and some of that outperformance is attributable to the ETF’s emphasis on high-quality, low volatility companies with the ability to service and grow payouts.
Today, some experts believe the setup for European stocks is similar to what was seen nearly three decades when the asset class flourished.
“At the headline level, the market continued to grind higher on the hope trade of future rate cuts and nearing bottom to earnings revisions, and the eventual return of flows into equities from money market funds,” observed Marina Zavolock, Morgan Stanley’s Chief European Equity Strategist. “Like 1995, we are also seeing a return to M&A from cycle lows, which should further support this rally. Notably, Europe’s low valuation starting point and rerating path so far is exactly in line with the 1995 Fed pivot playbook.”
Schwab International Equity Dividend ETF (SCHY)
The Schwab International Dividend Equity ETF (SCHY) is eye-catching on at least one level as its 0.14% expense ratio makes it one of the most cost-effective funds in the international dividend ETF category.
That coupled with large exposure to developed markets value stocks could make SCHY attractive to risk-averse investors seeking international equity income.
“The resulting portfolio favors stable companies that are likely to maintain their dividend payments. On average, its profitability has been consistently higher than the MSCI ACWI ex USA Value Index, and it has tended to incur less of the market’s risk,” notes Morningstar analyst Daniel Sotiroff. “Despite looking for stocks with higher dividend yields, it does not provide a higher yield than the value side of the market. As of October 2023, its trailing 12-month dividend yield stood at roughly 3.9%, placing it on par with its Morningstar Category index. That said, yield does not play a big role in the portfolio’s overall ability to deliver strong risk-adjusted performance relative to the MSCI ACWI ex USA Value Index.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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