In the current low-interest-rate
environment, focusing on dividends
has been popular. Many indexes focused on developed international equities showcase higher dividend yields
than those within the United States—not surprising, in that international companies tend toward higher dividend payout ratios
than U.S. companies.1
However, some of the most widely followed indexes of international dividend payers do not hedge
their exposure to currency fluctuations against the U.S. dollar. We’ve seen this have a SIGNIFICANT impact on recent performance. The potential certainly exists for currency movements to wipe out any benefit of a dividend-focused approach in developed international equities.
The Difference Hedging the Currency Exposure Can Make (12/1/13–8/3/15)
For definitions of indexes in the chart visit our glossary.
• Yield-Focused Dividend Indexes:
The S&P International Dividend Opportunities Index
—which focuses on higher-yielding international equities—was nearly 50% exposed to the Australian dollar and the euro. The Dow Jones EPAC Select Dividend Index
was more than 60% exposed to this same combination of currencies. No matter the merits of the stock selection approaches employed, if these currencies are depreciating against the U.S. dollar, it could contribute to a difficult environment for these Indexes.
• Growth-Focused Dividend Index:
The WisdomTree International Hedged Dividend Growth Index
takes a different approach, not focusing on the highest-yielding dividend payers, but more importantly seeking to neutralize the currency exposure. This way the experience of index returns is dictated by the dividend focus and quality
selection, as opposed to being further impacted by any movements in currency.2
Currency Was the Key Driver: More than Stock Selection
While WisdomTree believes its dividend growth methodology provides an important long-run strategy that can complement the benefits of a value
- or yield-focused selection methodology, over this period,3
currency was the dominant factor impacting returns.
Moreover, some markets, countries and regions have higher dividend yields than others. Strategies that focus on higher-dividend-yielding securities will habitually tend toward certain areas of global equities and away from others. Based on what we have seen, some of the larger exposures4
(based on currency) were as follows:5
• Australian Dollar:
The Australian dollar depreciated 9.72% against the U.S. dollar in 2015, through August 3. This is a “commodity currency,” which means that the direction of commodity price movements tends to relate to the strength (or weakness) of the Australian dollar. Through August 3, the S&P GSCI Index
was down more than 16% for the year.
One of the key forces impacting currency markets today regards central bank policy divergence. In the U.S., the Federal Reserve is contemplating raising short-term interest rates. In the euro area, a policy of quantitative easing
is in full force. Over time, this can have the potential to encourage a weaker euro against the U.S. dollar—and the euro has depreciated about 10% over this period.
• British Pound:
The United Kingdom tends to feature a number of high-yielding dividend payers. In 2015, the British pound hasn’t depreciated much, so exposure here on the currency side hasn’t been problematic of late.
• Canadian Dollar:
The Canadian dollar depreciated 11.86% against the U.S. dollar in 2015 over this period. Like the Australian dollar, this is also considered a commodity currency. Within Canada, oil is particularly important. On August 3, 2014, the price of oil was above $100 a barrel. One year later it was approximately $50. When that happens, it can be difficult to argue for a stronger Canadian dollar.
Minimize the Risk of Regret (& Blend the Focus on Dividends)
Many investors don’t like the idea of taking a “bet” one way or the other on currency. For people who are already invested internationally—while making a full bet on the currencies that are inherent to international unhedged
investments—we think the concept of 50% exposure to a hedged strategy and 50% exposure to an unhedged strategy is an interesting starting point.
Here, a 50-50 starting point that combines the WisdomTree International Hedged Dividend Growth Index with either the S&P International Dividend Opportunities or the Dow Jones EPAC Select Dividend Indexes provides further complementarity as they focus on different types of dividend payers: one on the growth segment and one on the yield segment.
But for investors who have no exposure today and are looking to add international exposure, a natural starting point could be the WisdomTree International Hedged Dividend Growth Index—which focuses on the stocks in international markets while hedging the currency exposure to target just the local market returns.
Source: Bloomberg, as of 8/3/15. Refers to the MSCI EAFE Index universe for developed international equities and the S&P 500 Index universe for U.S. equities.
Source for bullet points: Bloomberg, with data measured as of 8/3/15.
Refers to the period 12/1/13 to 8/3/15, or the live performance history of the WisdomTree International Hedged Dividend Growth Index.
The Australian dollar, euro, British pound and Canadian dollar were the four largest currency exposures within both the S&P International Dividend Opportunities Index and the Dow Jones EPAC Select Dividend Index as of 8/3/15, with source Bloomberg.
Source for bullet points: Bloomberg, for period 12/31/14–8/3/15, unless otherwise specified.