Hone in on HDEF for International Equity Compensation | ETF Trends

International developed market equities have long been a source of consternation for advisors and investors, but dividends have somewhat eased that pain.

Now, with many market observers wagering that 2023 will be a year in which value stocks and international equities outperform, there could be new life for ex-U.S. dividend stocks and the related exchange traded funds. Enter the Xtrackers MSCI EAFE High Dividend Yield Equity ETF (NYSE Arca: HDEF).

The $1.23 billion HDEF follows the MSCI EAFE High Dividend Yield Index, which is a collection of high-dividend stocks from developed markets, excluding the U.S. and Canada. Such a strategy has historically been a winning one, and some analysts expect that trend will continue in 2023.

“We raise international dividend equity ETFs from a Neutral to a Favorable View. International companies that can generate cash and sustain dividend payments have outperformed historically and we think they will continue to lead traditional benchmarks,” said Bank of America in a recent report.

Indeed, there’s overlap between HDEF and the traditional MSCI EAFE Index. To be precise, the overlap by weight between the ETF and that index is 16%, and 13.7% of the MSCI EAFE Index holdings are also HDEF holdings. However, those percentages aren’t large enough so as to restrain the historical outperformance of MSCI EAFE high yield stocks relative to the parent index.

“EAFE high dividends have exhibited a similar dynamic and have outperformed the vanilla EAFE by 230bps per year since 1995 with the same downside volatility,” added Bank of America.

HDEF makes good on the promise of being a high-dividend strategy. Currently, the fund sports a dividend yield of 5.74%, or more than double the 2.70% found on the MSCI EAFE Index. Another point in the fund’s favor is a roughly 24% combined allocation to the materials and communication services sectors — two groups favored by Bank of America in the MSCI EAFE universe.

While HDEF is structured as a high-dividend ETF, payout growth remains important. On that note, a nearly 24% weight to Switzerland and Japan is pertinent because those countries are homes to quality companies with rising payouts. Additionally, a more than 20% allocation to Germany and France — the Eurozone’s two largest economies — could benefit investors because those countries have notched solid payout growth in recent years. HDEF is up nearly 6% year-to-date.

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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.