A Solid Idea For International Equity Exposure In 2020

Ex-U.S. developed markets equities and the related exchange traded funds are getting bum reviews in 2019 because, although these assets are trading higher, they're lagging domestic benchmarks such as the S&P 500.

Broadly speaking, ex-U.S. developed markets ETFs are trailing domestic equivalents, but if investors knew where to look at the start of 2019, they would have been pleasantly surprised with the outcomes. For example, the WisdomTree International Hedged Quality Dividend Growth Fund IHDG is beating the S&P 500 by about 330 basis points year to date.

Past performance never guarantees future returns, but with the dollar remaining sturdier than expected and plenty of central banks outside the U.S. poised to lower rates next year, IHDG could deliver more upside in 2020 thanks to its currency hedging mechanism.

Why It's Important

IHDG has a lengthy history of topping the MSCI EAFE Index, a more relevant comparison for the ETF than U.S. benchmarks.

“Over the past 1-, 3-, 5-year and since-inception periods, the Fund has comfortably outpaced the average return of funds in its Morningstar peer group, the Foreign Large Growth category,” WisdomTree said in a recent note. “It has also outperformed the return of the MSCI EAFE Index in both local currency and USD terms. To our mind, this highlights the benefits of our stock selection process as well as the impact that a currency-neutral approach can have on total returns in international investing.”

The $577.46 million IHDG devotes about 42% of its geographic weight to the U.K. and Japan while Germany and Switzerland combine for more than 15%. Consistency has been a calling card for IHDG since its inception more than five and a half years ago.

“While IHDG has generated excess returns, it has also been remarkable for the consistency of its outperformance,” according to WisdomTree. “Over the 1-year and 3-year periods, it was consistently a top performer and was in the top 1% of all funds in its category over the 5-year and since-inception timeframes.”

What's Next

IHDG's emphasis on quality and dividend could benefit investors in 2020, particularly if volatility rises.

“It also helps allocate to companies with the potential to grow their dividend payments, which requires both financial health and effective use of retained income,” WisdomTree said. “The focus on quality has tended to tilt the Fund’s portfolio away from the financial sector, historically one of the largest weights in the MSCI EAFE Index, which has underperformed significantly since the global financial crisis.”

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