Vanguard founder Jack Bogle and Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett shared a similar approach to investing, generally dismissing the idea of regular investors putting their money in international ETFs.
“Bogle dismisses international diversification. Buffett, meanwhile, says an index fund portfolio of 90 percent S&P 500 and 10 percent Treasurys is probably good enough for most investors — that’s how he is recommending his wife invest. But the anti-international stance is the rare piece of investment advice over which many people dare to disagree with Bogle and Buffett,” CNBC contributor Elizabeth MacBride stated in April 2017.
At the time of MacBride’s article, the average U.S. mutual fund investor had just 15.6% of their equity portfolio invested in international markets. They call this lack of exposure “home country bias.”
- Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA)
- iShares International Select Dividend ETF (Cboe BZX:IDV)
- SPDR Portfolio World ex-US ETF (NYSEARCA:SPDW)
- Schwab International Small-Cap Equity ETF (NYSEARCA:SCHC)
- iShares MSCI Canada ETF (NYSEARCA:EWC)
- WisdomTree International MidCap Dividend (NYSEARCA:DIM)
- First Trust Emerging Markets AlphaDEX Fund (NYSEARCA:FEM)
If carried out for several decades, home country bias can act as a headwind to alpha-beating performance. To avoid getting left behind, here are seven international ETFs you can use to buck the trend.
International ETFs to Buy: Vanguard FTSE Developed Markets ETF (VEA)
If you’re looking to own a massive international ETF, you can’t get any larger than VEA. According to ETFdb.com, VEA is the 8th-largest ETF in the U.S. It currently has $76.1 billion in total net assets. If you throw in Vanguard’s Admiral Shares mutual fund class, that number bumps up to $121.7 billion.
VEA tracks the performance of the FTSE Developed All Cap ex US Index, charging a miserly 0.05% for the privilege. In case you’re wondering, that’s $5 for every $10,000 invested. You can get a latte for less these days.
In terms of diversification, VEA gives you 4,010 stocks invested in numerous countries other than the U.S. Europe has the largest weighting at 52.7%, the Pacific region is second at 37.7%, and North America (Canada) is third at 8.7%.
While the top 10 holdings only account for 10.4% of the portfolio, when you consider that the remaining 4,000 stocks have a weighting of 90%, those 10 are responsible for most of the ETFs overall performance.
Since its inception in July 2007, VEA has had an annual return of 1.65% through Aug. 31. Over the past decade, it has an annualized total return of 5.03% through Sept. 23. That compares to 13.39% for the entire U.S. markets.
In recent years, U.S. stocks have gotten the better of international stocks and international ETFs, but that can change in a hurry.
iShares International Select Dividend ETF (IDV)
As you can imagine, with the word “dividend” in the name of the ETF, the iShares International Select Dividend tracks the performance of a dividend-related index. In this case, that’s the Dow Jones EPAC Select Dividend Index.
First, if you’re unfamiliar with the index, EPAC stands for Europe, the Pacific, Asia, and Canada. In the Vanguard ETF previously, Canada accounted for 8.7% of the VEA portfolio. In this case, the country north of us has a slightly lower weighting at 7.7%. That makes Canada the four-largest weighting by region behind only Spain (10.4%), Hong Kong (10.5%), and the U.K. (24.1%).
The index invests in companies that pay large dividends.
To qualify, a company must have paid dividends for at least the last three years, its dividend-per-share ratio over the previous 12 months must be less than its average over the past three years. Lastly, the company’s five-year average dividend coverage ratio must be greater than or equal to two-thirds of the five-year average dividend coverage ratio of the corresponding S&P BMI country index, or greater than 118%, whichever is greater.
Additional qualifiers include positive twelve-month earnings per share, an average three-month daily volume of $3 million, and a float-adjusted market capitalization of at least $1 billion.
Unlike VEA, IDV’s top 10 holdings account for 33% of the ETF’s $3.2 billion in total assets. Further, it only has 94 holdings compared to more than 4,000.
However, it comes at a cost. Its management expense ratio is 0.49%, almost 10 times the cost of VEA.
SPDR Portfolio World ex-US ETF (SPDW)
Like many ETF providers, State Street (NYSE:STT) has created a suite of funds that are diversified, low-cost, liquid, transparent, and tax-efficient. Only instead of “core” in the ETF name, they’ve gone with “portfolio.”
You say to-mate-o, I say to-mat-o. The important thing is it’s trying to give investors the best possible products at the lowest possible cost.
SPDW tracks the performance of the S&P Developed Ex-U.S. BMI (Broad Market Index) Index. The index is a subset of the S&P Global BMI Index. The S&P Global Equity Index Committee approves the countries included in the index.
The largest country by weighting is Japan at 24.6%, more than double the U.K., the next-largest country holding at 11.4%. Canada, like always, comes in around a weighting of 8.6%. In terms of sector weights, the top three are industrials (15.8%), financials (15.0%), and health care (12.6%).
Like VEA, SPDW holds a lot of stocks at 5,221, charges very little at 0.04% annually, has a weighted average market cap of $54.8 billion, and over the past five years, has performed almost identically to the Vanguard international ETF.
Schwab International Small-Cap Equity ETF (SCHC)
One reason Americans don’t broaden their horizons outside the U.S. is they think international ETFs and stocks are riskier than those homegrown companies. Which means most investors won’t go near a small-cap international fund like SCHC.
However, at a management expense ratio of 0.11% and almost $2.5 billion in total assets, investors have learned to trust international ETFs like Schwab.
The typical holding in SCHC has a weighted average market cap of $2.35 billion, a price-to-earnings ratio of 14.6, and a return on equity of 11.2%. So, while many of the holdings aren’t large-caps, they’re not small stocks by any stretch of the imagination.
If you’re Canadian, you’ll be familiar with some of the ETF’s top 10 holdings. There are several large gold miners on the list. Canada holds its own, accounting for 18.4% of the fund’s assets, second only to Japan at19.5%.
As I said, there are several gold miners in the top 10. Perhaps that’s why materials stocks account for 12.5% of the portfolio, putting it second behind industrials (19.9%), but ahead of technology (11.6%).
Diversification is this ETF’s strong point with 2,135 stocks. Further, the top 10 holdings account for only 5% of its total assets. SCHC is an international small-cap investing with a reasonable level of risk.
iShares MSCI Canada ETF (EWC)
Typically in this type of article, I like to spread the love amongst ETF providers. However, being from Canada, I couldn’t resist dropping in iShares’ ETF that’s focused on companies based north of the border.
EWC has a decent following with total net assets of $2.1 billion. The ETF tracks the performance of the MSCI Canada Custom Capped Index.
The capped reference means that one stock can’t represent more than 25% of the assets in the index. Should a stock get to 25%, at the quarterly rebalance, its weighting would be reset to 22.5%. Also, if there are five stocks with a weight of 5%, at the next rebalance, each of those stocks would be reset to 4.5%, so as not to exceed 22.5%.
That’s an interesting wrinkle in ETF rebalancing.
As for the specifics, EWC has a total of 86 stocks, with the top holding being Royal Bank of Canada (NYSE:RY) at a weighting of 7.4%. Next in line is Shopify (NYSE:SHOP) at 7.1%, followed by Toronto-Dominion Bank (NYSE:TD) in third at 6.1%.
Canadian stocks used to be laggards compared to U.S. stocks. However, over the past six months, EWC has managed to outperform the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
If the U.S. continues to have economic troubles post-election, look to EWC to help ease the pain.
WisdomTree International MidCap Dividend (DIM)
WisdomTree is one of the largest ETF providers in the country, yet it doesn’t seem to get a lot of love from the investment media. I think the company’s international ETFs are some of the best available if you’re looking for something different, but not too different. That’s why whenever it’s appropriate, I like to include one of its funds.
In this case, DIM fits the bill because I’ve often felt like mid-cap stocks are the sweet spot when it comes to investing. That’s because you get ownership in companies that are still growing but are large enough to withstand economic downturns.
DIM tracks the performance of the WisdomTree International MidCap Dividend Index. It is a group of mid-cap stocks selected from the WisdomTree International Equity Index.
The first thing you’ll notice when you look at the country allocation is that not only is the U.S. excluded from the holdings, so too is Canada. As a result, Australia manages to show up in third place with a 7.7% weighting. Ahead of it in second is the U.K. at 11% and Japan at 31.7%.
Sector-wise, financials take first place with a weighting of 17.3%, industrials are next at 15.9%, and in third place are materials at 13.4%.
As for the actual holdings, I’m not sure many people would recognize a lot of the names, even in its top 10. However, its 2.6% SEC 30-day yield ought to make up for some of the added mystery.
First Trust Emerging Markets AlphaDEX Fund (FEM)
First Trust is another provider I don’t think gets enough attention among international ETFs, but I don’t spend my every waking hour focused on them, so I’ll leave the ETF provider ratings to those that do.
The other six ETFs on this list are primarily investing in stocks from developed markets. FEM invests its $402.5 million in total net assets in emerging markets stocks. Currently, there are 150 stocks with a maximum market cap of $143.1 billion, a minimum market cap of $102 million, and a median market cap of $5.9 billion.
Not small, not large, but right in the middle.
The top three countries in terms of exposure shouldn’t come as a surprise, given the focus on emerging markets. China is first with 38.1%, Hong Kong is second with 10%, and Taiwan is third at 8%.
The stocks selected for this ETF go through a double selection process. First, stocks are selected from the NASDAQ Emerging Markets Index that has positive Alpha or positive risk-adjusted returns. The stocks that make the cut are then put through the AlphaDEX selection methodology, which is a combination of growth and value criteria.
What’s left are 150 stocks, which are then divided into quartiles based on their rankings and then equally-weighted within their quintiles.
I’m not going to candy coat this ETF. Its performance has been less than stellar. Year to date, it’s down 16.6%. Over the past three years, it’s averaged -5%; you have to go back five years to get a positive annual return of 7%.
As they say, “Every dog has its day.” FEM will have its day and then some sooner than you think.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.