Dividends are back in vogue right now, but current income alone may not be enough to make expensive and potentially volatile U.S. equities a particularly appealing place to be. For some, it may make more sense to invest abroad in a foreign dividend ETF. Such a fund could potentially offer current income and diversification away from a complicated U.S. market while also mitigating or even removing the barrier posed by currency.
That’s where a pair of ETFs like the Franklin FTSE Europe Hedged ETF (FLEH) and the Franklin FTSE Japan Hedged ETF (FLJH) can play a key role. Europe and Japan have each enjoyed phases of positive U.S. investor attention so far this year, with the Euronext 100 index up nearly 5% over the last month and the Nikkei 225 up 0.3% in that same time frame.
Europe’s outlook has seen its 2023 growth projection increase from 0% to 0.3%, and should the European Central Bank navigate persistent inflation, underlying consumer spending could still help the continent ride a COVID recovery into some positive numbers. Japan, meanwhile, has seen its government take both fiscal and monetary stimulus stems to support, but it has also benefitted greatly from the post-COVID recovery, particularly in tourism.
See more: “3 Low-Fee Single Nation ETFs to Diversify Outside U.S.”
Those pictures offer a pretty notable contrast to a scary headline-filled landscape in the U.S., from a lingering series of bank and commercial real estate issues to the almost-forgotten problem of the U.S. debt ceiling. Whether those or other issues have driven investors towards dividends, FLEH and FLJH are seeing eye-popping annual dividend yields.
FLEH, which charges 9 basis points (bps) to track an index of mid- and large-cap stocks and hedges out the currency challenges that come with foreign equities, has seen a 21.3% annual dividend yield compared to 3.8% for its ETF Database category average, for example. FLJH — which is broadly similar to FLEH, but for Japan — charges the same fee and has offered a 24.6% annual dividend yield compared to 6.7% for its average.
Taken together, a low-fee foreign dividend ETF like either FLJH or FLEH can be a low-risk play that helps buoy portfolios with current income. With inflation data arriving this week in earnest, and a possibly heady earnings season around the corner, looking abroad for dividends could be a worthwhile option in the weeks and months ahead.
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