At a time when U.S. interest rates are rising, income investors may want to consider ex-US dividend stocks and the related exchange traded funds. One idea on that front is the Vanguard International High Dividend Yield ETF (NasdaqGM: VYMI).

An easy way of looking at the Vanguard International High Dividend Yield ETF is that it is the international answer to the wildly popular Vanguard High Dividend Yield ETF (NYSEArca: VYM), one of the largest U.S. dividend ETFs. VYMI has a trailing 12-month yield of 3.23%. While tempting, there are some risks to consider with high dividend stocks, foreign or domestic.

“Funds that focus on dividend yield can harbor risk,” said Morningstar in a recent note. “Stocks with high dividend yields achieve their status from price declines, a consequence of poor prospects, declining fundamentals, or some combination of the two. Thus, this group tends to be riskier and more volatile than the broader market. As a result, funds that focus on high-yielding stocks tend to have a value orientation.”

Geographic Exposure Across Europe

VYMI holds just over 880 stocks, 19% of which are from emerging markets. Europe accounts for just over 54% of the ETF’s weight. Over 40 countries are represented in the ETF with the U.K. and Switzerland combining for 26.1% of VYMI’s geographic exposure. VYMI’s geographic mix could be compelling at a time when both developed and emerging markets stocks trade at significant discounts to the S&P 500.

“Emerging markets are projected to outperform developed markets in dividend growth. Among emerging markets, the Americas is expected to lead (17 percent), followed by Asia (12 percent) and EMEA (12 percent). The Eurozone is expected to lead in developed markets (15 percent), followed by APAC (10 percent),” according to Markit.

VYMI weights its holdings by market value, a strategy that can be rewarding with international dividend stocks.

“VYMI’s bogy weights its holdings by market cap, which naturally emphasizes large, stable companies while underweighting those that are smaller and more volatile. This approach also incorporates a stock’s price into the equation, which may be a better predictor of future performance as it–in theory–reflects all known information,” according to Morningstar.

For more on smart beta ETFs, visit our Smart Beta Channel.

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.

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