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The Invesco International Dividend Achievers ETF (PID) is one of the rare dividend funds that has outperformed its relevant benchmark since the Great Recession. While high expenses of .55% for an index fund and poor after-tax returns make the fund less than a slam dunk, there could be some value in it as a holding for investors looking for income-oriented international exposure. Just be aware of the fund’s heavy exposure to Canada and the UK.
Invesco International Dividend Achievers ETF Overview
The fund tracks the NASDAQ International Dividend Achievers Index and normally invests at least 90% of its assets in the securities that comprise the index. The index is a group of international stocks (including ADRs and stocks that trade on foreign exchanges) that have increased their cash dividend payments consistently each of the last five years. The five-year time period the index uses differs slightly from the US version of the dividend achievers index which uses a ten-year time horizon.
The result is, as you would expect, a fund with a sizeable dividend yield, 3.37% over the previous 12 months. The fund is reasonably diversified amongst sectors with financials, industrials, and communications being the top three sectors by weight.
(Source: Fund website)
However, the fund appears to be a bit less diversified when it comes to country weighting. Almost two-thirds of the fund is invested in just Canada and the UK.
(Source: Fund website)
However, it’s worth pointing out that a lot of the companies the fund is invested in have operations all over the world regardless of where their headquarters are. Additionally, Canada and the UK are two stable (Brexit notwithstanding) Western nations with well-established rules of law. So, the country concentration issue here is not even close to say an emerging market’s fund with half its assets in a country on the brink of civil war. However, the fund’s concentration in Canadian financials is worth keeping an eye on given the levels of private sector debt in Canada.
It’s also interesting to note that almost 8% of the fund screens as US stock despite the fund being solely devoted to international stocks. Looking through the holdings, we saw a few stocks that might be the culprit.
- Amdocs (DOX) – Israeli company but headquartered in the US.
- Linde plc (OTC:LIN) – Formed by merger of Praxair (US company) and Linde plc.
- Logitech (LOGI) – Administrative HQ is in US but headquartered in Switzerland.
- Willis Towers Watson (WLTW) – US company Towers Watson was merged into Willis Group.
- Thompson Reuters (TRI) – British but has a headquarters location in US.
- Nielsen plc (NLSN) – Headquartered in the US, but company was formed from merger of Dutch and British companies.
We think all of these can be reasonably classified as international, so we don’t see any evidence that the fund or index is straying from the international mandate.
Performance
One of the most shocking things about the fund is that in an era when growth has outperformed value, a fund targeting high and consistent dividend payers (which is usually regarded as a type of value style) has actually outperformed its benchmark.
(Source: Fund website, data presented as of 3/31/2019)
Yes, the outperformance isn’t very much, only 33bps per year since inception, but it’s better than underperformance! However, once taxes are taken into account, that outperformance mostly disappears (at least for high income investors since the after-tax returns are shown using the highest statutory tax rate).
However, one reason for the good performance may be that there hasn’t quite been the same divergence between the value and growth factors in international markets as there have been in the US. The graphic below shows the returns of the iShares International Growth ETF (EFG) and the iShares International Value ETF (EFV).
(Graphic source: Fund website, EFG and EFV labels added by author)
The dispersion between growth and value has only been about 150bps over ten years for international markets (for reference, in the US, the spread has been around 250bps over the past decade and almost 500bps over the past five years).
By contrast, the ETF that follows the US version of the index PID tracks has underperformed the market. Below is the performance of the Vanguard Dividend Appreciation Fund.
(Graphic source: Vanguard website)
By comparison, Vanguard’s Total Stock Market Index Fund (VTI) has returned slightly more than 16% annually over the past 10 years. So, the dividend appreciation strategy has worked well overseas but not as well at home.
High Expense Ratio
The major issue we have with this fund is its high expense ratio of .55%. The fund tracks a well-established quantitative index that should be easy to manage. We don’t see why a fund based on an index that is easily constructed should have such high fees. The Vanguard fund that tracks NASDAQ’s US version of the dividend appreciation index has an expense ratio of just .08%. We also doubt that buying foreign stocks is a reason for such high expenses. After all, many stocks in the fund are ADRs or are listed on US exchanges. Furthermore, it’s not like the UK or Canada where the fund has almost two-thirds of its holdings in two backwater countries with poorly developed stock exchanges beset by high fees. The two other iShares funds that we mentioned earlier that track simple international indices (the value and growth funds) have expenses of .38%. Still a bit high, but much less than .55% for PID.
Summary
Overall, the PID might hold some interest for investors looking for international income funds but high expenses hold us back from getting behind the fund wholeheartedly. Additionally, investors should be aware that they have substantial exposure to Canada and, particularly, Canadian financial institutions. Given some of the private sector debt statistics for Canada, we think that exposure might make the fund riskier than investors may think. Remember, the word “dividend” does not always equate with safe, low volatility investments.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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