Broadly speaking, developed market international equities and related ETFs have been a source of frustration for investors for awhile. Over the past three years, the MSCI EAFE Index returned barely more than a third of what the S&P 500 delivered.
Though still trailing the S&P 500, the MSCI EAFE Index has shown signs of life this year. For market participants wanting to revisit international equities, there are potentially better bets than the old-guard, pure-beta plays in the group. Consider the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG).
The fund tracks the WisdomTree International Hedged Quality Dividend Growth Index. It provides a buffer against foreign currency fluctuations, and that’s proven advantageous. For the three years ending July 31, the ETF beat the MSCI EAFE Index by 860 basis points. It’s also topping the benchmark again this year. Clearly, currency hedging has helped. And so have IHDG’s quality traits.
Investigating International ETF IHDG’s Quality Advantages
As a stand-alone investment factor, quality isn’t new. Its applications with domestic equities are old. But it’s only been about three decades since quality was widely applied to benchmarks such as the MSCI EAFE Index.
Brian Manby, investment strategy associate at WisdomTree, noted that quality’s had a shorter history with ex-US developed market stocks. But the combination has proven potent.
“Quality’s results so far prove even more enticing. Among large-cap companies from the developed ex-U.S. region, high-quality outpaced low-quality in more than 80% of rolling three-year return observations and 89% of rolling five-year intervals,” he observed in a recent note. “Across 10-year periods, however, high-quality outperformed 100% of the time. To date, there has never been a 10-year interval where the least profitable companies in the large-cap developed ex-U.S. universe beat the most profitable.”
Combine the above with IHDG’s aforementioned outperformance of the MSCI EAFE Index. That’d be enough to satisfy many advisors and investors. But upon further examination, the WisdomTree ETF has more to like. That includes its weighting methodology. How IHDG’s roster is constructed can lead to more quality names residing in the ETF and those with lesser quality attributes being excluded. Return on equity is one of determinants of quality in IHDG and that’s positive for investors.
“The first quintile of companies by ROE contributed about three-quarters of the annualized outperformance due to allocation and stock selection effects. Over-weighting in that quintile by more than 40% on average since inception, combined with the success of the individual companies held within it, explains virtually all the alpha over the past decade,” concluded Manby.
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