There’s been ample talk of an international equity resurgence this year, and while stocks in developed markets outside the U.S. are delivering solid performances, they’re likely to again lag the S&P 500 owing to a lack of growth stock exposure.
That shouldn’t imply investors should be glossing over international stock funds, but it pays to be selective in this segment. The WisdomTree International Equity Fund (NSYEArca: DWM) could be one of the standouts in this group because it latches onto the theme of ex-US-developed market dividends, which can provide compensation and diversification within US/tech-heavy portfolios.
DWM follows the WisdomTree International Equity Index. It’s comprised of developed market dividend payers, excluding U.S. and Canadian stocks. DWM has soundly outperformed the MSCI EAFE Index over the past two years. This proves that the combination of developed market stocks and payouts is attractive. DWM was also noticeably less volatile than the widely observed developed markets benchmark over that span.
DWM: Alluring Proposition
In theory, a distribution yield of 8.11% would be enough to get many investors in the DWM door, but that eye-catching trait is supported by other impressive fundamentals, including the notion that U.S. stocks, as of the end of the second quarter, were dramatically overvalued relative to developed market peers.
“Our Morningstar U.S. Market Index trades at about a 60% premium to our global ex-U.S. index,” noted Morningstar strategist Dan Lefkovitz. “Now, there has long been a premium. It’s justifiable to some extent, given the growth orientation of the U.S. market and the profitability of some of the top companies in the U.S. But the valuation gap has really widened dramatically in recent years. So, if you go back 15 years, the valuation gap was more like 15%.”
Additionally, DWM’s dividend proposition doesn’t solely revolve around the aforementioned big yield. Led by economies such as Japan, France, and Switzerland, which combine for 41.5% of the ETF’s geographic exposure, there are quality payout growth attributes to be had in this fund.
For investors focusing on yield, many ex-US market sport payout yields in excess of the S&P 500 – a fact confirmed by DWM. Plus, financial market history indicates U.S. stocks won’t maintain leadership roles forever. Eventually, some DWM member countries will get their grooves back against domestic equities.
“Market history is defined by cycles, rotations, and changes in leadership. Non-U.S. stocks have outpaced U.S. stocks for extended periods in the past, such as the mid-1980s and from the late 1990s into the mid-2000s. U.S. stocks have led for well over a decade and could be due for a reversal,” according to Morningstar.
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