Advisors and investors have likely had their fill of waiting on the ex-U.S. developed markets equity redemption story, particularly when it comes to European stocks, but 2022 could be the year when things finally tilt in favor of developed economies outside of the U.S.
Some market observers believe that Europe can lead the way, but the region has long frustrated U.S. investors, indicating that a less direct approach may be advisable. Enter the ALPS International Sector Dividend Dogs ETF (NYSEArca: IDOG), which isn’t a dedicated Europe exchange traded fund, and, as its name implies, offers investors income while waiting for the international equity redemption story to be penned.
Scenarios that investors in the U.S. may be overlooking could augur well for European stocks this year.
“Note that rising rates have historically accompanied the outperformance of European stocks compared to the U.S. and within European stocks, outperformance of value stocks over growth stocks,” says Jeffrey Kleintop of Charles Schwab. “This is largely attributed to the greater cyclicality of both European equities and value stocks. The ten-year European bond yield, which has been in decline since 2007 may be starting a meaningful rise, a possible indication that European value stocks could begin to outperform growth stocks.”
IDOG answers the cyclical value and European equity bells. For example, the ALPS fund allocates over 21% of its combined weight to the materials and energy sectors. It also features exposure to 10 European economies, which combine for about two-thirds of the fund’s geographic exposure.
In this environment, those could be positive attributes because “…U.S. and global benchmark yields are gaining traction, moving higher along with positive global economic sentiment,” concludes Schwab’s Kleintop. “Because they are still low by historical standards, we believe they will still be positively correlated to market returns. In this rate environment, economically sensitive stocks, such as European stocks and value stocks, may be poised to outperform based on historical patterns. While rising inflation could risk breaking down this correlation, investors may want to consider increasing their overall stock allocation, with a focus on more cyclical areas of the market.”
Adding to the case for IDOG this year are expectations that global dividends, including European payouts, will continue rising. IDOG, which yields 3.56%, is up an impressive 4.85% to start 2022, easily outpacing the S&P 500.
Other international developed market dividend ETFs include the FlexShares International Quality Dividend Dynamic Index Fund (NYSEArca: IQDY), the ProShares MSCI EAFE Dividend Growers ETF (CBOE: EFAD), and the SPDR S&P International Dividend ETF (NYSEArca: DWX).
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.