Advisors and investors have heard plenty this year about the quality factor's laggard status relative to its momentum counterpart. In fact, quality has been on a drag on some of the most popular U.S. dividend exchange-traded funds.
For investors looking for international income, the good news is that the quality factor is alive and well, particularly when it comes to its application to the widely followed MSCI EAFE Index. As of the end of the third quarter, the MSCI EAFE Quality Index was up 2 percent on a year-to-date basis compared to a loss of almost 1 percent for its local currency counterpart, the latter of which does not focus on the quality factor.
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Related Link: Counting On Quality With ETFs
Quality And Dividend-Based Strategies
The advantages of applying the quality factor to a dividend-based EAFE strategy are evident with the WisdomTree International Hedged Quality Dividend Growth Fund (WisdomTree Trust (NYSE:IHDG)). IHDG has surged nearly 11.5 percent year-to-date compared to a modest loss for the benchmark MSCI EAFE ETF.
A Closer Look At IHDG
In Q3, the EAFE Broad was down nearly 9 percent, but IHDG was down merely 4.8 percent. This is approximately 4.2 percent outperformance. EAFE Quality also outperformed EAFE Broad by more than 5 percentage points. Median outperformance of EAFE Quality over EAFE Broad when EAFE Broad was negative was closer to 1.5 percent, so this represents a significant period, in our view, said WisdomTree in a note out Wednesday.
The Index And The Fund
IHDG tracks the WisdomTree International Hedged Quality Dividend Growth Index (WTIDGH).
That currency-hedged benchmark is comprised of the top 300 companies from the WisdomTree DEFA Index with the best combined rank of growth and quality factors. The 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, according to WisdomTree, the fifth-largest U.S. ETF issuer.
The UK and Switzerland combine for over 30 percent of IHDG's geographic weight, which makes sense for at least two reasons. First, the countries are home to plenty of large- and mega-cap companies that not only trade in the United States, but also fit the quality definition. Second, the UK and Switzerland are two of best dividend growth markets in the developed world after the United States.
Broadening to the year-to-date 2015 period, we see that EAFE Broad delivered a negative return of nearly 1.0 percent. EAFE Quality was up 2.0 percent, and IHDG was up nearly 4.1 percent over this same time frame, added WisdomTree.
Related Link: Quality Conundrum For Dividend ETFs
While we recognize that this was just one single three-month period (as well as one single year-to-date nine-month period), we still believe it to be worth noting. If people think markets could continue to exhibit volatility similar to what was seen in the third quarter of 2015, we think that looking toward quality should be of particular interest.
Investors And IHDG
Investors are warming to the IHDG story. The ETF had $495 million in assets under management in early October when the fund was last highlighted by Benzinga, but that number is now close to $580 million.
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