The quality factor that serves as the backdrop for a growing number of alternatively-weighted exchange traded funds is often associated with dividends.
That makes sense. A company’s ability to not only sustain, but grow payouts can highlight management quality and balance sheet integrity. An increasing number of ETFs are marrying the quality and dividend concepts at the international level. One of those ETFs that is just over a year old is the FlexShares International Quality Dividend Dynamic Index Fund (NYSEArca: IQDY).
IQDY is one of three international quality dividend ETFs launched by FlexShares in April 2013. The other two funds are the FlexShares International Quality Dividend Index Fund (NYSEArca: IQDF) and the FlexShares International Quality Dividend Defensive Index Fund (NYSEArca: IQDE). [Forgotten Smart Beta ETFs]
IQDY tracks the performance of the Northern Trust International Quality Dividend Dynamic Index, which provides exposure to high-quality, income-oriented non-U.S. international equities that are weighted by target overall beta between 1.0 to 1.5 times that of the Parent Index, dividend yield, quality factors and lower total risk.
Despite its efforts to target elevated beta, IQDY is not an excessively risky ETF as evidenced by 47.2% of the ETF’s weight going to value stocks, almost twice the weight allocated to growth stocks. Plus, investors are compensated for the risk in the form of a trailing 12-month yield of nearly 3.3%, according to FlexShares data.
Country exposures are also always pivotal in evaluating a diversified international ETF, but that is especially true of global dividend funds. Put simply, investors should look for ETFs heavy on markets with dividend growth potential.
Japan is IQDY’s second-largest country weight at 14.2%. The world’s third-largest economy is not the developed market dividend destination that the U.S. or U.K. are, but Japanese dividends have grown over the past decade and Abenomics is expected to facilitate even more dividend growth in the land of the rising sun. [Japan’s Dividend Potential]
IQDY’s dividend growth and yield advantages come by of about a third of the ETF’s combined weight going to the U.K., Australia and Switzerland. Australian companies paid $40.3 billion in dividends last year, nearly double the amount paid in 2012 while the U.K. was the second-largest developed markets dividend payer after the U.S. [Consider Aussie Dividends]
Remember that developed market dividend payers often sport higher yields than their U.S. counterparts in the same sectors, an important consideration if and when U.S. interest rates rise.
Speaking of rising rates, IQDY has gained 6.2% in the past 90 days despite rampant talk the Bank of England will soon boost rates and speculation the Reserve Bank of Australia could be forced to do the same. [Australia ETFs in Focus on Rate Hike Talk]
IQDY’s Japan and Eurozone exposure balances the fund nicely between countries and regions where rates will remain low for the foreseeable future and those that could soon seen higher rates.
FlexShares International Quality Dividend Dynamic Index Fund