Investors who are seeking out additional income options may take a look at attractive yield-generating opportunities in international exchange traded funds.
Across the globe, bond market yields have been sliding as foreign central banks try to weaken their currencies, engage in loose monetary policies and add quantitative easing. The nominal yields for the benchmark 10-year notes of the U.S., U.K., Germany and Japan have trended lower over the past 15 years, according to a recent Deutsche Asset and Wealth Management research note.
While international investors have chased after yield-generating assets, foreign dividend yields are still higher than payouts from U.S. companies.
“Overseas markets have historically tended to be higher dividend payers than those in the United States,” according to DeAWM. “The dividend yields of the S&P 500 Index (U.S.), FTSE 100 Index (United Kingdom) and DAX (Germany) over the last fifteen years or so, averaging 1.9%, 3.6% and 2.9%, respectively. Not only are dividend yields currently higher abroad, but this trend has also been very consistent over time. For an investor motivated by an absolute level of income, accessing these higher levels via an international perspective could be attractive.”
However, when accessing international equities, people will be exposed to currency risks. Consequently, investors seeking equity income might consider a high-dividend-yield hedged ETF options.
For instance, Deutsche Asset and Wealth Management recently launched four new high-dividend-yield, currency-hedged ETFs, including the Deutsche X-trackers MSCI EAFE High Dividend Yield Hedged Equity ETF (NYSEArca: HDEF), Deutsche X-trackers MSCI Eurozone High Dividend Yield Hedged Equity ETF (NYSEArca: HDEZ), Deutsche X-trackers MSCI Emerging Markets High Dividend Yield Hedged Equity ETF (NYSEArca: HDEE) and Deutsche X-trackers MSCI All World ex-US High Dividend Yield Hedged Equity ETF (NYSEArca: HDAW). [Alternative Income ETF Strategies for a Shifting Environment]
DeAWM’s international dividend ETFs provide attractive yields – the high-dividend-yield indices select companies with dividend yields greater than or equal to 1.3 times the yield of the parent index and screen for quality, including return on equity, earnings variability and debt-to-equity. Additionally, the new funds also utilize forward currency contracts to diminish the negative effects of an appreciating U.S. dollar or weakening foreign currencies over the short-term – weaker foreign currencies mean a non-hedged position would generate a lower U.S. dollar-denominated return. [Global Dividend ETFs That Help Diminish Currency Risks]
“We are only a few years into a cyclical U.S. dollar bull market with such cycles historically lasting an average of eight years,” according to DeAWM. “With the U.S. Federal Reserve Board (Fed) liable to increase the federal funds rate in the near-term and the U.S. economy accelerating at a faster rate than many other developed markets, there is a case for U.S. dollar tailwinds. Indeed, Deutsche Bank’s FX strategists are forecasting the U.S. dollar to strengthen significantly through 2016 vs. the three next most traded international currencies—the euro, the yen and the pound. If those forecasts prove correct, there could be a significant drag on performance of an unhedged approach.”
HDEF’s underlying index has a 4.9% dividend yield. HDEZ’s underlying index has a 4.7% dividend yield. HDEE’s underlying index has a 4.8% dividend yield. Lastly, HDAW’s underlying index has a 4.9% dividend yield.
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.