3 Issues With International Dividend Yield ETFs (DWX, IDV)

International Dividend Yield ETFs​ have emerged as a new asset class for investors. These ETFs track indexes that consist of international companies that pay out high dividends to investors across the world. 

According to 2014 research by Vanguard, non-U.S. equities accounted for 51% of total worldwide equities. The research also stated that the MSCI global index, which consists of a mix of emerging and developed markets, experienced the least amount of volatility between 1988 and 2013.  

A number of such funds have made their debut in the market in recent times. For example, SPDR S&P International Dividend Fund (DWX) has yields that top 5% and annual fees of 0.45%. Similarly, iShares International Select Dividend Yield (IDV) has returns of over 6% and an expense ratio of 0.50 %. Other international yield funds include Global X SuperDividend (SDIV) and First Trust Dow Jones Global Select Dividend Fund (FGD). Vanguard also recently launched two fund groups targeting international stocks with dividend yields. The Vanguard International High Dividend Yield Index Fund and Vanguard International Dividend Appreciation Index Fund track the FTSE All World ex US High Dividend Yield Index and the NASDAQ International Dividend Achievers Select Index respectively.

Factors To Consider While Evaluating International Dividend Yield Funds  

According to Morningstar Research Inc., three factors can affect returns for such funds. 

The first one is country allocation. An emphasis on countries whose companies have a history of high dividend payouts can alter risk for the fund. Because they tend to pay out high dividends, Australian companies tend to have high weightings. As such, the fund performance depends significantly on the percentage of its exposure to that country's economic fortunes. Similarly, Japanese companies have a history of paying out low dividends and constitute a relatively low percentage of such funds. 

The second factor to consider while evaluating these funds are currency exchange rates. Dividend payouts are made in local currencies and need to converted to U.S. dollars (or, to the local currency of the fund's home base) to calculate returns. Using the example above, the Australian dollar has depreciated against a rising dollar in recent times. This has affected returns for ETFs, which track indexes heavily invested in the country. According to Morningstar research, underweighting in Japan has been a headwind for iShares Select Dividend because Japanese stocks rallied between 2013 and 2015. 

The third factor to consider are the tax implications of dividend yields. Funds are required to pay out taxes on capital gains in the countries that they are invested in. Typically, investors get foreign tax credits for their returns. In some cases, where the fund is classified as a Tax Advantaged Account, they need not pay tax.   

The Bottom Line 

International Dividend Yield ETFs allow investors interested in exposure to international markets to take part in these markets. But, they should consider country allocation, currency exposure, and tax implications before investing in such funds.