The Potential Long-Term Benefits of Investing Globally

schwartzfinal
Executive Vice President, Global Head of Research
Follow Jeremy Schwartz
06/05/2020

One question we are often asked is, “why bother with international investments?” U.S. multinational companies have revenue generated all over the world, so what if diversification is just a matter of “de-worseifying” and bringing suboptimal outcomes?

I understand this concern, considering that for a long stretch of time, the U.S. has outperformed the rest of the world. Over the past 10 years ending May 31st, the MSCI USA Index has outperformed the MSCI EAFE Index by more than 7% annualized per year.1

However, we believe there are long-run benefits of investing globally.

There are strong parallels to “growth” dominating “value” within the U.S. markets when looking at foreign markets versus the U.S.

Standard market cap-weighted international indexes have sector exposures akin to U.S. value benchmarks. There is a particular lack of technology sector exposure and over-weight positioning in financials and commodity-dependent sectors.

Figure 1_Sector Exposure Intl indexes

For definitions of terms in the chart, please visit our glossary.

But not all international strategies have these sector tilts.

The WisdomTree international quality dividend growth strategies have a sector balance closer to the S&P 500, particularly being over-weight in Technology versus the MSCI EAFE Index and providing meaningful weights to the Health Care and Consumer sectors.

Below we show the WisdomTree International Quality Dividend Growth Fund (IQDG), which is derived from a developed world universe, as well as the WisdomTree Global ex-U.S. Quality Dividend Growth Fund (DNL), which screens from a global universe (minus the U.S.) that also includes emerging markets.

In shifting the weight away from traditional value benchmarks, they also have little exposure to sectors that are typically value heavyweights, such as Energy and Financials.

Figure 2_Sector Exposure Fund Level

For definitions of terms in the chart, please visit our glossary.

We believe screening for profitability, low leverage and earnings growth creates a valuation profile that is more attractive than broader international benchmarks.

Yes, the MSCI EAFE Index is less expensive than the S&P 500 on a price-to-earnings (P/E) ratio basis (by about five points), but the S&P 500 has a return on equity (ROE) that is 65% greater, profit margins that are 35% higher and less leverage. We believe these higher margins and profitability ratios warrant the premium multiple of the S&P 500.

By contrast, when one focuses on these profitability and growth metrics in selecting higher quality companies, the situation is completely reversed.

Developed World: The WisdomTree International Quality Dividend Growth Fund, which seeks to track, before fees and expenses, the price and yield performance of the WisdomTree International Quality Dividend Growth Index, currently has an ROE that is 41% greater than the S&P 500, profit margins 4.7% higher and a leverage ratio that is approximately one-third that of the MSCI EAFE Index and half of the S&P 500. For these better profitability and growth metrics, investors are also not paying a premium multiple to the S&P 500 but getting the market at a two-point P/E discount instead.

Global ex-U.S.: The WisdomTree Global ex-U.S. Quality Dividend Growth Fund, which seeks to track, before fees and expenses, the price and yield performance of the WisdomTree Global ex-U.S. Quality Dividend Growth Index, was able to improve ROE and margin ratios even further and is available at a lower multiple of 15x for the developed world universe.

Figure 3_Characteristics Table

For definitions of terms in the chart, please visit our glossary.

While the characteristics of broad international benchmarks are understandably “less expensive for good reasons,” we believe our basket of international quality stocks looks attractively priced versus the S&P 500 for its improvement in quality and growth characteristics.

The performance history appears quite compelling to us as well. Both recently and over the long term, the two funds have outperformed similar broad market indexes that are market cap-weighted. In most cases, they’ve outperformed by a few percentage points as well, signaling that there have always been opportunities in international markets, despite them being out of favor.

Figure 4_DNL and IQDG Std Performance

For standardized fund performance of the Funds in the table, please click their respective tickers: IQDG, DNL.

Likewise, the relative performance has demonstrated their appeal in both up-markets and volatile ones. In many cases, the Funds were able to add value the most when the broad indexes declined, resulting in a downside buffer or even outright positive performance.

IQDG Performance vs. MSCI EAFE

Figure 5_IQDG Performance vs. MSCI EAFE

DNL Performance vs. MSCI ACWI ex-U.S. Growth Index

DNL Performance vs. MSCI ACWI ex-U.S. Growth Index

At WisdomTree, we believe there are just as many opportunities in international markets as there are in the United States. The differentiator, however, is accessing them in the right way, and we are confident that a quality and dividend-oriented approach might provide investors with the results they’re looking for when investing overseas.

 

1Source is Bloomberg as of 5/31/2020.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing their investments on certain sectors increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Heightened sector exposure increases IQDG’s vulnerability to any single economic, regulatory or other development impacting that sector. This may result in greater share price volatility. IQDG invests in the securities included in, or representative of, its Index regardless of their investment merit, and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. Due to the investment strategy of IQDG, it may make higher capital gain distributions than other ETFs. Please read each Fund’s prospectus for specific details regarding the Fund’s risk profile.

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About the Contributor
schwartzfinal
Executive Vice President, Global Head of Research
Follow Jeremy Schwartz
Jeremy Schwartz has served as our Executive Vice President, Global Head of Research since November 2018 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity indexes, quantitative active strategies and multi-asset model portfolios. Mr. Schwartz joined WisdomTree in May 2005 as a Senior Analyst, adding to his responsibilities in February 2007 as Deputy Director of Research and thereafter, from October 2008 to October 2018, as Director of Research. Prior to joining WisdomTree, he was head research assistant for Professor Jeremy Siegel and helped with the research and writing of Stocks for the Long Run and The Future for Investors. Mr. Schwartz also is co-author of the Financial Analysts Journal paper, What Happened to the Original Stocks in the S&P 500? He received his B.S. in Economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Mr. Schwartz is also a member of the CFA Society of Philadelphia.