Vanguard International Dividend ETF: Opportunity For Div Growth Investors

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As I write this article the morning of Friday, June 17, with the market still open, we sit just slightly off the recent lows on all 3 major U.S. market indexes; the Dow, the S&P 500, and the Nasdaq. Still, these averages are between roughly 19% and 33% off their 52-week highs. The S&P 500 index, perhaps the best overall indicator of the U.S. market, still sits in bear market territory.

U.S. markets haven’t suffered these declines in isolation. Foreign markets have experienced similar drops. As just one example, iShares Core MSCI Total International Stock ETF (IXUS), which tracks the MSCI ACWI ex USA Index, currently sits roughly 25% below its 52-week-high.

I mention this simply to remind investors that, even in the midst of all this turmoil in the U.S. market, opportunities may exist outside our borders as well.

For investors interested in diversifying the stream of dividends feeding your portfolio, in this article, I will feature one ETF in particular that may be worthy of your attention. This is the Vanguard International Dividend Appreciation ETF (NASDAQ:VIGI). We will start by diving into the index from which this ETF is constructed, then take a look at specifics around the ETF itself.

Before we are done, as a bonus, I will offer a very brief look at a second ETF that you might wish to pair with VIGI, to round out your coverage.

So let’s get started, shall we?

Vanguard International Dividend Appreciation ETF – Digging In

Over 16 years ago, on 4/21/06, Vanguard introduced Vanguard Dividend Appreciation ETF (VIG). With some $76.1 billion in Assets Under Management (AUM), it ranks among the largest 20 ETFs in the world.

Perhaps it is not surprising, then, that on February 15, 2016, roughly 10 years after the inception of VIG, Vanguard decided to expand their coverage of the dividend-growth segment beyond the borders of the U.S., with the inception of the Vanguard International Dividend Appreciation ETF. Reflecting the increased costs associated with trading foreign securities, VIGI’s expense ratio is .15%. However, this is excellent for this category.

VIGI seeks to track the S&P Global Ex-U.S. Dividend Growers Index. Using the methodology document for this index, let’s take a quick look at key elements of its construction.

The S&P Dividend Growers Index Series measures the performance of companies that have followed a policy of consistently increasing dividends every year for a specified number of years. The indices are subject to an indicated annual dividend yield exclusion, with the top 25% highest yield ranked eligible companies from the index universe excluded from index inclusion. Companies classified as part of the Global Industry Classification Standard (GICS) Real Estate Investment Trust Industry (REITs), are excluded. Constituents are float-adjusted market capitalization (FMC) weighted, subject to a single constituent weight cap of 4%.

Please note the overall policy of excluding companies with top 25% highest yields. A high current dividend can be the result of a low stock price. And a low stock price may mean one of two things; that a company is in an industry with little to no growth or, even worse, that the company’s finances are in trouble.

The methodology document goes on to feature that, in the case of S&P Global Ex-U.S. Dividend Growers, the following specific criteria apply:

  • Included companies must have increased dividends for at least 7 consecutive years.
  • Included companies must have three-month median daily traded values of US $500,000 (or US $250,000 for current constituents).

Before we leave this section, allow me to briefly highlight 3 additional features of the index that should serve to lower both volatility as well as transaction costs:

  • Stocks are weighted by float-adjusted market capitalization – Basically, this means that closely-held shares are excluded, so only shares available to investors are included in the weighting. The result? Less turnover due to weighting adjustments.
  • A three-day rebalance window – What is the benefit of this? As opposed to being forced to complete all trades within one business day, this reduces the market impact of these potentially significant trades.
  • A buffer on that 25% high-yielding dividend screenExisting securities in the index are only excluded if they fall in the highest 15% of yields. This balances risk against the cost of unnecessary turnover.

That last one is interesting. Above, I mentioned the benefit of excluding the companies with the top 25% of yields. However, in the case of existing constituents, the index seeks to somewhat balance that risk against the transaction costs generated by unnecessary turnover.

With that, let’s take a closer look at the ETF itself, starting with this excellent…

Read More: Vanguard International Dividend ETF: Opportunity For Div Growth Investors

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