Duration has applications with equities, and like the fixed income counterpart, it’s best to shorten up equity duration in the current market environment.
That doesn’t mean abandoning stocks altogether, however. In what may come as a surprise to some investors, an effective way for reducing a portfolio’s equity duration is with international stocks.
“By ranking the stocks in the MSCI World Index by this ratio, we can see that short duration stocks (the 20% of stocks with the lowest price to cash flow) continued to outperform the overall market and their long duration counterparts (20% of stocks with the highest price to cash flow) in April, as they have done since interest rates began to rise in August 2020,” notes Jeffrey Kleintop of Charles Schwab.
Among exchange traded funds, an idea for investors to ponder is the WisdomTree International Quality Dividend Growth Fund (CBOE: IQDG). IQDG follows the WisdomTree International Quality Dividend Growth Index (WTIDG), and with its emphasis on favorable dividend characteristics, the benchmark and IQDG could be effective avenues to strong cash flow generators — a hallmark of short-duration stocks.
“Short duration stocks dramatically outperformed both long duration stocks and the overall MSCI World Index when bond yields climbed from their low in August 2020,” adds Kleintop.
IQDG’s quality focus is relevant at a time when growth and value are increasingly correlated — a condition that could motivate investors to focus on other factors. Additionally, IQDG is pertinent for income seekers, as highlighted by a distribution yield of 3.88%, which is well above what investors find on the S&P 500 or 10-year Treasuries.
Further enhancing the case for IQDG is the point that rosy 2022 dividend growth expectations aren’t confined to the U.S. Rather, payouts in several of IQDG’s largest countries are forecast to increase this year. Those nations include Japan, Switzerland, and the U.K.
Getting back to the issue of short-duration stocks, international could be the way to go to embrace this concept.
“Low price to cash flow stocks can be found in all sectors and countries. But they tend to be more concentrated in the indexes of international markets. Although 39% of the 1,539 stocks in the MSCI World Index are U.S.-based companies, U.S. stocks make up 59% of long duration stocks and only 31% of short duration stocks. The remaining short duration stocks (69%) are international companies,” concludes Schwab’s Kleintop.
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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.
