Vanguard Targets International Income Investors with New Dividend ETFs

Dividend investing has become extremely popular over the past several decades since it provides a predictable income stream for investors over time. In particular, older investors looking for reliable income use dividends as a way to extract value from their portfolio while keeping equity for capital appreciation purposes. Similarly, many companies issue dividends to attract long-term investors rather than short-term traders to their stock.

International investors have access to hundreds of different exchange-traded funds (“ETFs”), but there are relatively few income-focused options. Moreover, many international investors use either active strategies focused on exploiting short- to medium-term trends or passive strategies focused on long-term capital appreciation and diversification. These dynamics leave many income investors with few options outside of the United States.

Vanguard’s New Funds

Vanguard, the largest provider of mutual funds and the second largest provider of ETFs in the world, announced that it would launch international versions of its two most popular ETFs – the High Dividend Yield ETF (ARCA: VYM) and the Dividend Appreciation ETF (ARCA: VIG). According to the announcement, the funds are expected to become available in December 2015 and they’re expected to attract significant capital in the current interest rate environment.

Including international holdings adds another dimension to a balanced portfolio, because the markets move differently from those in the U.S. and the costs of international investing have decreased, making it easier to capture these diversification benefits.
-- Vanguard’s CIO Tim Buckley

As a pioneer of low-cost index funds, the new international dividend ETFs will have low expense ratios and diversified exposure to hundreds of thousands of different equities from both developed and emerging markets around the world. A second key advantage is that international dividend portfolios have historically experienced higher dividend yields than U.S. only exposure because U.S. equities tend to have slightly lower yields.

Taking a Closer Look

The Vanguard International High Dividend Yield Index Fund will focus on investing in high dividend stocks in both emerging and developed markets worldwide with a 0.3% expense ratio. With the FTSE All-world ex-US High Dividend Yield Index as its benchmark, the ETF will own more than 800 of the highest-yielding large- and mid-cap stocks across these markets, providing an ideal mix for income investors looking to maximize their dividends.

The Vanguard International Dividend Appreciation Index Fund will focus on investing in companies with growing dividend yields with a 0.25% expense ratio. With the NASDAQ International Dividend Achievers Select index as its benchmark, the ETF will invest in more than 200 all-cap stocks with a long history of increasing dividend payments in both emerging and developed markets, with an added focus on stable earnings and low debt loads.

Both funds will be managed by the Vanguard Equity Index Group, which is one of the world’s largest index managers, overseeing 79 index funds and annuity portfolios with aggregate assets of $2 trillion.

Alternatives for Investors

Vanguard’s new funds aren’t the only international dividend ETFs for investors to consider, with several existing options providing opportunities. In both of these cases, the funds have higher expense ratios, but those figures could come down after Vanguard’s launch. Investors should consider all of their options before selecting an international ETF.

Some alternatives that are already trading include:

  • SPDR S&P International Dividend ETF (ARCA: DWX) – The SPDR S&P International Dividend ETF tracks the S&P’s benchmark index with a 0.45% gross expense ratio and 121 holdings from around the world.
  • iShares International Select Dividend ETF (ARCA: IDV) – The iShares International Select Dividend ETF tracks high dividend paying equities in non-U.S. developed markets with a 0.5% expense ratio and 99 holdings in its portfolio.

Key Takeaway Points

  • Dividend investors have become extremely popular over the past several decades, particularly when interest rates are low.
  • International investors have a few different options when it comes to international dividend ETFs, but Vanguard’s funds will provide compelling alternatives.
  • Vanguard’s international dividend ETFs come in two flavors and have expense ratios that are lower than many competing funds.