One of the key developments thus far in 2015 has been the outperformance of developed world equity markets1 compared to the U.S. In recent weeks, that return differential has narrowed, as overseas investors discount an “accident” in Greece, while U.S. investors remain focused on the timing of pending Fed rate hikes. Global equity markets may be range-bound until we get greater visibility over how these events unfold—in Greece over the coming weeks, and in Washington over the coming months.

As investors pause to reposition their portfolios—and with global interest rates likely to remain at historic lows for some time—many investors continue to search for ways to squeeze dividend income out of their equity exposure. This raises an interesting question: What index should be “beta” for measuring how well your international dividend exchange-traded fund (ETF) or foreign equity income manager is performing compared to an index of the developed world’s dividend payers?

In 2006, WisdomTree created what we believe is the broadest gauge of the dividend-paying universe in the developed world outside the U.S.: the WisdomTree DEFA Index (WT DEFA Index). That Index comprises more than 2,400 dividend-paying companies selected from 15 developed European countries, Japan, Australia, New Zealand, Hong Kong, Israel and Singapore.2 The Index, which sported a total market capitalization of more than $18.5 trillion as of this same point in time, is a barometer for how the dividend-paying part of the market is performing in industrialized countries outside the U.S. and Canada.

Many don’t realize this but internationally, dividend-paying stocks could literally be considered the market. For example, about 98% of the weight in the MSCI EAFE Index consists of dividend-paying securities.3 That means WisdomTree can weight its broad international benchmark based on the cash dividends companies have paid in the prior year, while ending up with a representative measure of the developed world equity market. Since its inception in May 2006, the WisdomTree DEFA Index has exhibited a 0.99 correlation to the MSCI EAFE Index.

One benefit of dividend-weighting an equity market is that the dividend yield typically increases compared to a comparable cap-weighted index. As of March 31, for example, the WT DEFA Index had a trailing 12-month dividend yield of 3.72%, at a time when the MSCI EAFE Index was yielding 2.98%.4 Yet historically higher dividend yields have not compromised the Index’s ability to generate total returns that exceeded EAFE on a cumulative basis since June 1, 2006. This is important. Sometimes when investors reach for yield, they sacrifice the total return potential of their equity exposure.

WisdomTree DEFA Index vs. MSCI EAFE Index (6/1/2006–3/31/2015)

DEFA Index v MSCI EAFE Index

For definitions of terms and indexes in the chart, please visit our glossary.