Investors looking to bolster their dividend portfolios can find compelling opportunities in developed markets outside the U.S. Many dividend payers in these markets sport higher dividend yields than the equivalent U.S. equities, and exchange-traded funds (ETFs) make accessing a broad basket of foreign dividend stocks easy and cost effective. Employing smart beta strategies in combination with the search for international income can benefit investors as well. Per a report by Barron's, international equity smart beta ETFs represented 14% (developed) and 7% (emerging) of total institutional investments in ETFs for 2017, both up over the previous year.

Developed Markets

While dividend ETFs have long been one of the major contributors of smart beta assets and the subsequent growth in this part of the ETF space, some issuers have gone beyond standard weighting strategies, such as weighting by yield or length of dividend increase streaks. One example of a multi-factor approach to ex-U.S. developed markets is the JPMorgan Diversified Return International Equity ETF (JPIN). This ETF is a credible alternative to the popular MSCI EAFE Index, which remains cap-weighted. The ETF also offers investors a play on rebounding earnings trends in developed markets outside the U.S.

JPIN climbed by more than 25% during 2017. In recent months, however, it has given up a significant portion of those gains.

Emerging Markets

Cap-weighted approaches to emerging markets often receive criticism for being over-exposed to a small number of sectors. The MSCI Emerging Markets index is a good example of this. With well over $1.9 trillion benchmarked globally to the index, more than half of the Index is allocated toward only three countries (China, South Korea and Taiwan). This means that investors putting their money in the Emerging Markets Index with an expectation of geographic and sector diversity may be surprised to know that they could actually be exposing themselves to risk for this reason.

Fortunately, smart beta approaches can help to reduce this risk. One example of a fund attempting to extricate itself from this problem is the JPMorgan Diversified Return Emerging Markets Equity ETF (JPEM). JPEM does not track an MSCI Index, which means it is free to adjust its geographic distribution and weighting accordingly. Traditionally, JPEM has excluded South Korea, and it weighs Chinese names much less significantly than the MSCI Emerging Markets Index.

Of course, these funds also carry their own risks. When ex-U.S. markets outperform, they drive up cap-weighted benchmarks along the way, making it more difficult for smart beta ETFs to generate notable returns for investors.