Risks still linger in the Eurozone, but thanks to compelling valuations and investors’ desire to find solid returns in the developed world beyond the U.S. and Japan, European stocks and ETFs have found their footing. In the past month, the Vanguard FTSE Europe ETF (NYSEArca: VGK) is up 4% while the S&P 500 is off 1.8%.
Recent economic data out of Germany and France, the Eurozone’s two larges economies, has been decent. On a regional basis, data points have been noticeably less bad and showing some signs improvement. Better data has helped boost some of the more controversial Europe ETFs as funds tracking Greece, Italy and Spain are among the top-performing non-leveraged ETFs over the past month. [Italian Renaissance: Italy ETF Soars]
Investors looking for some Europe exposure without the commitment and potential risks of an all-Europe ETF have some credible options. One avenue for grabbing that type of global exposure while getting compensated for the risk is with the WisdomTree DEFA Equity Income Fund (NYSEArca: DTH).
An easy way of describing DTH is that it is the dividend-focused equivalent of the popular iShares MSCI EAFE ETF (NYSEArca: EFA), one of the largest ETFs in the U.S. ETF itself is not a bad income option with a 30-day SEC yield of almost 3.1%, but that pales in comparison to the 5.3% offered by the $235.9 million DTH.
U.S. equities have the star performers this year, but there are compelling reasons for investors to consider ratcheting their developed markets (ex-U.S.) exposure higher.
“While we are likely to continue to see more volatility abroad, international markets mostly look cheap compared to US stocks and potentially offer some long-term value. Today, based on price-to-book values, other developed markets trade at a 20% discount to the United States,” said iShares Global Chief Investment Strategist Russ Koesterich. [iShares: Don’t Lose Sight of International ETFs]
As for DTH, it does share some similarities with EFA, though it is not an exact replica. For example, Japan is not a great dividend destination compared to the U.S. or some European countries. DTH features just a 4.1% weight to the world’s third-largest economy compared to 21.6% in EFA. The U.K., Australia and France combine for 54% of DTH’s weight.
Like many of the WisomTree dividend ETFs investors are already familiar with, DTH tracks an index that weighs its components based on annual cash dividends paid. Over the past three years, the WisdomTree DEFA Equity Income Index has slightly outperformed the MSCI EAFE Value Index, according to WisdomTree data.
Eurozone nations combine for about 34% of DTH’s weight. Like EFA, DTH is meaningfully allocated to the financial services sector, one of the drivers behind the recent success of European equities. DTH has a 25% weight to that group followed by telecom at 15.1% and energy at 11.5%.
DTH’s lack of Japan exposure has not adversely affected the fund this year as it has performed inline with EFA with both gaining nearly 11%. The WisdomTree fund has had a beta of 1.05 against the MSCI EAFE Index since inception in mid-2006. However, DTH does feature the superior dividend yield and had a P/E ratio of 14.1 at the end of the second quarter. EFA’s current P/E is 21.
WisdomTree DEFA Equity Income Fund
ETF Trend editorial team contributed to this post. Tom Lydon’s clients own shares of EFA.