Just like in the U.S., stock markets overseas have tanked this year. The MSCI ACWI (all-country world index), excluding the U.S., dropped 20% year to date through July 19.
But there may be opportunities amid the carnage. Daniel Sotiroff, a senior manager research analyst for Morningstar identifies three international stock exchange-traded funds that focus on high-quality companies.
“We think all three are great long-term investments that should provide a smoother ride than the broader foreign stock market,” he wrote in a commentary.
Morningstar rates each fund silver (its second highest rating after gold).
Vanguard International Dividend Appreciation ETF
(VIGI)
The fund looks for foreign stocks that have increased their dividends for seven years or more, Sotiroff said. “And it forgoes those that are most likely to cut dividend payments in the near future.”
Seven years represents a “really strict hurdle that pulls VIGI toward well-managed, shareholder-friendly companies,” he said.
“It skews toward names trading at higher multiples and lower dividend yields. This ETF tends to hold highly profitable stocks.”
In addition, “focusing on dividend growth causes this portfolio to focus on stocks from stable sectors, such as healthcare and consumer staples, … with proportionally smaller stakes in the information technology sector,” Sotiroff said.
iShares MSCI International Quality Factor ETF
(IQLT)
The fund “takes a more direct route [than VIGI] to high-quality stocks, looking for stocks with a strong combination of profitability, low debt, and consistent earnings growth,” Sotiroff said.
“It tweaks the weights of these stocks to emphasize names with the strongest combination of these characteristics, while honoring some additional constraints to prevent sector biases from creeping into its portfolio.”
The fund doesn’t consider stocks’ valuations, Sotiroff said. “So its average price multiples tend to skew higher than the MSCI ACWI ex USA Index.”
However, “that doesn’t necessarily mean its holdings are priced above their true underlying value,” Sotiroff said. “Like VIGI, many of IQLT’s holdings have strong competitive advantages that may justify higher multiples.”
SPDR MSCI EAFE Strategic Factors ETF
(^QEFA)
“It’s a multifactor strategy that splits its portfolio evenly across the value, low-volatility, and quality factors,” Sotiroff said.
“The quality and low-volatility factors … both tend to favor many of the same stocks held by VIGI and IQLT, so the overall portfolio tends to lean toward the same names.”
But QEFA doesn’t go all-in on these types of companies like VIGI and IQLT, Sotiroff said. “QEFA’s value-oriented sleeve provides some balance.”
That “should be a benefit when cheaper stocks outperform their more expensive counterparts, as they have over the first few months of this year,” he said. “While QEFA is down about 18% for the year, that value sleeve has provided a little bit of an advantage over VIGI and IQLT.”
