This ETF Is Crushing Traditional EAFE Indexes

Investors have been piling into ex-US developed markets exchange-traded funds this year. Three developed markets ETFs are among this year's top asset-gathering ETFs and each member of that trio offers exposure to the widely followed MSCI EAFE Index or an equivalent benchmark of international developed markets.

Investors have been rewarded for their faith in ex-US developed markets. The MSCI EAFE Index is higher by more than 12 percent year-to-date, easily outpacing the 7.6 percent returned by the S&P 500. However, some international developed markets strategies are proving even more lucrative.

Just look at the WisdomTree International Quality Dividend Growth Fund IQDG. That unheralded ETF is higher by almost 18 percent this year. IQDG follows the WisdomTree International Quality Dividend Growth Index (WTIDBG), which marries the growth and quality factors.

A Different Kind Of Index

IQDG's underlying index's “growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three-year historical averages for return on equity and return on assets. Companies are weighted in the Index based on annual cash dividends paid,” according to New York-based WisdomTree.

IQDG features exposure to 22 countries and makes for a suitable alternative to standard EAFE strategies by allocating nearly half its combined weight to the U.K., Japan and Switzerland. The ETF's holdings are weighted based on annual cash dividends paid, a strategy that has enabled IQDG's index to top the MSCI EAFE benchmark by 90 basis points since inception. Additionally, IQDG's has displayed comparable volatility metrics against the MSCI EAFE Index.

“Nearly every fundamental factor managed to outperform MSCI’s market cap-weighted approach,” said WisdomTree in a recent note. “The lone exception was that value lagged. In the remainder of this piece, we seek to highlight the primary drivers of performance relative to a market cap-weighted approach.”

Sector Weights Matter

IQDG lives up to its quality objective with substantial allocations to sectors that fit the definition of that important investment factor.

“Significant over-weights in the Consumer (Staples, Discretionary) and Healthcare sectors, combined with significant under-weights in Financials, were the primary drivers of the performance differential,” said WisdomTree. “Interestingly, WisdomTree’s methodology added value in nearly every sector excepting Utilities (2.3% weight). To put this performance in perspective, allocations to quality dividend growth in EAFE have delivered returns double those of the S&P 500 so far in 2017.”

Consumer sectors and healthcare combine for about 60 percent of IQDG's weight.

Related Links:

A New Multifactor ETF

How Factors Work With International ETFs