Fifteen years certainly qualifies as “long-term” and that’s roughly the length of time in which major domestic equity benchmarks beat international rivals. That worm is turning this year.
Through May 2, the widely followed MSCI EAFE Index is higher by 10.9% year-to-date – an advantage of 310 basis points over the S&P 500. The international benchmark has also been noticeably less volatile than its domestic counterpart. Additionally, select country-specific exchange traded funds are outperforming U.S. equities.
Advisors that have been in the game awhile – a long while – remember that there have been times when international stocks bested U.S. rivals. For example, that scenario was at play for more than four years spanning early 2003 through late 2007.
It remains to be seen for exactly how long this current bout of international out-performance lasts, but one thing is clear: Advisors should be selective in how they choose to access it on behalf of clients.
Make the Quality Call
For advisors looking to temper some of the risk associated with ex-US stocks, focusing on quality has merit. That includes embracing dividends.
“WisdomTree has been running the WisdomTree International Quality Dividend Growth Index since November 29, 2013 (the Index’s base date)—nearly 10 years. One of the most interesting ways, in our opinion, to look at the quality factor over a period of time regards sector positioning. If we look across the full history of live performance, we can see the average sector weights relative to the well-known and widely followed MSCI EAFE Index benchmark,” writes Christopher Gannatti , global head of research at the firm.
The index highlighted by Gannatti is proving in real time the benefits of pairing international stocks with payouts. It’s up 14.44% year-to-date, beating both the MSCI EAFE Index and the S&P 500 by wide margins.
Proving that methodology matters, the WisdomTree index is underweight financial services stocks relative to the MSCI EAFE Index – an important trait following the collapse of Credit Suisse and lingering concerns about stress in the global banking system.
Over the lifespan of the WisdomTree index, it’s been materially underweight bank stocks while being overweight consumer staples and healthcare relative to the MSCI benchmark. Hence, the quality purview.
Sector Attribution Matters
In traditional pure beta benchmarks, financial stocks have been a key reason for longstanding under-performance against U.S. equities, confirming that advisors need to prioritize sector attribution when revisiting ex-US equities.
The proof is in the pudding. The same pertains to perks associated with quality dividends as an avenue to revisiting international stocks.
“The WisdomTree International Quality Dividend Growth Index returned 10.89%, whereas the MSCI EAFE Index returned 8.47%. This means that the WisdomTree approach outperformed by 2.42%, at least showing us that the first part of this potential trend in favor of developed international equities is being captured,” concludes Gannatti.
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