With economic growth coming in above trend and the labor market still robust, the Federal Reserve has continued on its path to interest rate normalization. Outside the United States, the story is somewhat different. Economic growth remains positive, but less synchronized in 2018 relative to 2017, as economies are in different stages of their business cycles.
In addition, interest rates in many developed markets remain at ultra-low levels, causing a divergence in rate paths. Exhibit 1. This nuanced global market environment and divergent interest rate story suggest that investors looking for income – particularly those that rely on dividend-paying stocks – may want to consider opportunities outside the United States.
How the Yield Factor Has Performed Amid Rising Rates
Rising interest rates typically spell underperformance for bond-like stocks. This has been consistent in 2018 as high-yielding U.S. stocks have trailed the market by more than 4%. But because the macro and interest rate story differs outside the United States, equity performance in international markets has diverged as well. Yield-oriented stocks, for example, are not facing the same fundamental headwinds internationally that they are in the U.S and are down only 1% relative to the index. In emerging markets, high-yielding stocks are actually outperforming the FTSE Emerging Markets index by nearly 1%. Exhibit 2.
Blending Yield and Value May Offer Benefits
Investors have many options for meeting their income needs, dividend-paying stocks among them. But for a core income-producing holding, dividend strategies that focus on yield alone may leave portfolios overexposed to characteristics that are less attractive today. For example, loading up on U.S. companies that pay steady dividends may leave investors tilted toward overvalued companies.
As an alternative, blending the yield and value factors can deliver a potentially higher-yielding portfolio with attractive fundamentals that one may not find by focusing on yield alone. With the launch of international developed and emerging market dividend ETFs within our Ultra Dividend Revenue suite, investors can build a global portfolio that takes advantage of these potentially favorable characteristics.
The U.S., international developed, and emerging market indices in our Ultra Dividend Revenue suite each screen their respective universes for a targeted number of high-yielding companies, then weight that high-yielding basket by top-line revenue. Our revenue-weighting approach grounds each dividend index in a proven fundamental metric, which mitigates the tendency to overpay for income.
When combined, the three indices result in a global equity income portfolio that offers high income potential and attractive valuations. Specifically, a portfolio built using equivalent regional weights in the FTSE All-World Index offers a holdings-based dividend yield of 5.10% relative to the broad market of 2.41%, along with a higher free cash yield and low price-to-sales ratio. Exhibit 3.
When it comes to dividend investing, particularly in the current environment, it may not make sense for investors to limit themselves to the U.S. market, despite its size. Furthermore, investors that focus exclusively on the yield factor style as a core holding may find themselves with a concentration in overvalued stocks. With our expanded offering of the Ultra Dividend Revenue suite, investors are now able to create a high-dividend, value-oriented global portfolio to meet their income needs.
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Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
An investment in the Fund is subject to investment risk, including the possible loss of principal amount invested. There is no guarantee that the issuers of stocks will declare dividends in the future, or that dividends will remain at their current levels or increase over time. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Eurozone investments may be subject to volatility and liquidity issues. Emerging and developing market investments may be especially volatile. The Fund is classified as a “non-diversified” fund and may invest a greater portion of its assets in the securities of a single issuer. Investing significantly in a particular region, industry, sector or issuer may increase volatility and risk. Fund returns may not match the return of its respective index, known as non-correlation risk, due to operating expenses incurred by the Fund. The alternate weighting approach employed by the Fund (i.e., using revenues as a weighting measure), while designed to enhance potential returns, may not produce the desired results. Because the Fund is rebalanced quarterly, portfolio turnover may exceed 100%. The greater the portfolio turnover, the greater the transaction costs, which could have an adverse effect on Fund performance.
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