[This ETF Industry Perspective is sponsored by Vanguard.]
The search for yield continues, and dividend products remain a popular destination for asset flows. As demonstrated in the chart below, YTD net flows to international dividend ETFs recently eclipsed their U.S.-focused peers for the period ending August 31, 2017. As investors position their portfolios for changing economic, growth and political outlooks, our opinion is that this preference for international dividend strategies makes a lot of sense.
Several key drivers are behind this shift. Atypically, 2017 has been marked by synchronized growth in all geographic regions.1 This has translated into diversified support across global equity markets. Likewise, firming growth overseas has given developed-economy central banks (e.g., Bank of Canada, Bank of England and European Central Bank) the confidence to signal or initiate monetary-tightening actions. If these other central banks mirror the Federal Reserve’s gradual path of rate normalization, we believe equity yields in developed as well as emerging regions should continue to entice investors. Lastly, the urge following President Trump’s election to hedge against a strengthening U.S. dollar has now cooled; this has rekindled interest in overseas investments.2 Taken together, we believe these drivers should continue to support flows into international dividend strategies.
Anyone looking to diversify their dividend income by investing abroad has several different strategies from which to choose. Although each strategy is unique, many incorporate the same shortcomings. For example, we think many international dividend funds have too much exposure to Australia and Canada, former Commonwealth countries that historically have been a source for yield, and too little exposure to Japanese and emerging market dividend payers. These biases have the potential to introduce unnecessary risk into investor portfolios. The wide availability of global dividend products means investors should be able to find a diversified strategy. FlexShares International Quality Dividend Index Fund (IQDF) may fit the bill. It employs a thoughtful and deliberate investment approach that targets dividend quality and yield while adhering to robust diversification and risk controls.
1 Zumbrun, Josh, “Global Economies Grow in Sync,” Wall Street Journal, Aug. 23, 2017.
2 Bloomberg data, DXY Index -9.34% as of Aug. 31, 2017.
The opinions expressed herein are those of the author and do not necessarily represent the views of Northern Trust. Northern Trust does not warrant the accuracy or completeness of information contained herein. Such information is subject to change and is not intended to influence your investment decisions.
Before investing, carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information is in the prospectus and a summary prospectus, copies of which may be obtained by visiting https://www.flexshares.com/prospectus. Read the prospectus carefully before you invest.
Foreside Fund Services, LLC, distributor.
An investment in FlexShares is subject to numerous risks, including possible loss of principal. Fund returns may not match the return of the respective indexes. The Funds are subject to the following principal risks: asset class; commodity; concentration; counterparty; currency; derivatives; dividend; emerging markets; equity securities; fluctuation of yield; foreign securities; geographic; income; industry concentration; inflation-protected securities; infrastructure-related companies; interest rate/maturity risk; issuer; large cap; management; market; market trading; midcap stock; MLP; momentum; natural resources; new funds; nondiversification; passive investment; privatization; small-cap stock; tracking error; value investing; and volatility risk. A full description of risks is in the prospectus.
FlexShares International Quality Dividend Index Fund (IQDF) is passively managed and uses a representative sampling strategy to track its underlying index. Use of a representative sampling strategy creates tracking risk where the Fund’s performance could vary substantially from the performance of the underlying index. Additionally, the Fund is at increased dividend risk, as the issuers of the underlying stock might not declare a dividend, or the dividend rate may not remain at current levels. The Fund is also at increased risk of industry concentration, where it may be more than 25% invested in the assets of a single industry. The Fund may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that country, market, industry, sector or asset class. Finally, the Fund may also be subject to increased volatility risk, where volatility may not equal the target of the underlying index.
