Daniel Sotiroff: The dominance of US large-cap stocks over the past 15 years has been astonishing. Their winning streak has left a lot of other ETFs from other categories in the dust. International value ETFs certainly fit that description. Their performance has undoubtedly languished over the past 15 years.
That backdrop provides a wonderful opportunity to separate good from great. Great ETFs tend to stand out when their underlying investment style is down. They also share some common traits: They tend to follow relatively simple processes, diversify broadly, and charge fees that are far lower than many of their competitors.
3 Great International Value ETFs
Schwab Fundamental International Equity ETF FNDF
Vanguard International High Dividend Yield ETF VYMI
Avantis International Small Cap Value ETF AVDV
That said, first up for today is Silver-rated Schwab Fundamental International Equity ETF, which trades under the ticker FNDF. This ETF has been around since 2013, so it’s taken its licks and has generally held up well within its category.
It targets large- and mid-cap stocks from overseas developed markets with the strongest fundamentals, or those with the strongest sales, retained cash flows, and dividends plus buybacks. Such companies tend to be more financially resilient, so this ETF is less likely to hold the most distressed stocks in its selection universe. It also includes profitable, growth-oriented stocks that can aid performance when value stocks are out of favor.
FNDF uses an unconventional approach to weight stocks, and it’s the main source of this ETF’s value orientation. It assigns weights based on those same fundamental metrics—sales, cash flow, and dividends plus buybacks. So, it will overweight a stock as its price declines relative to those metrics. That could expose the ETF to stocks whose fundamentals may decline in the near future, but this is a very broad portfolio that holds nearly 1,000 stocks. So, the overall net effect of deteriorating stocks has not been large enough to derail its long-term performance.
The second ETF for today is for all of you dividend fanboys and girls out there. Silver-rated Vanguard International High Dividend Yield ETF, ticker VYMI. This ETF is built to deliver a dividend yield that’s higher than the broader foreign stock market, but it’s a great value ETF in its own right.
Focusing on dividend yield is what pushes this ETF toward the value side of the style box, and it follows a rather straightforward process. It looks for all dividend-paying large- and mid-cap stocks listed outside of the US and simply holds the higher-yielding half.
Value traps, or stocks with deteriorating fundamentals and declining prices, are worth paying attention to. These stocks can work their way into many high dividend yield ETFs and threaten performance, including this one. But VYMI takes the measures to guard against such risks. Holding half of the dividend-paying universe means it diversifies across hundreds of stocks and limits the influence of any single distressed company. It also weights stocks by their market cap. That puts more emphasis on larger, more stable firms that usually have enough earnings to weather the market’s storms and continue making good on their dividend payments.
The last ETF on my list comes from the high-risk-high-return small-value segment of the Morningstar Style Box. Bronze-rated Avantis International Small Cap Value ETF, which trades under the ticker AVDV, is a great choice for cheaper stocks at the smaller end of the market-cap spectrum.
Avantis’ managers follow a rules-based process to select and weight stocks. They start with all small-cap names from overseas developed countries and choose those with a healthy combination of low price multiples and high profitability. The managers will then overweight stocks with lower valuations and higher profitability—two risk factors that should add to its long-term return.
Most small-value ETFs simply hold stocks from the cheaper half of the small-cap market. AVDV is a little different in that it’s looking for stocks that look cheap relative to their profits. That means it still holds stocks from the cheaper side of the market, but it will fold in some growthier stocks if their profits are high enough to support their steeper valuations. Like FNDF, holding some growth stocks should help steer it away from trouble when cheap stocks go through a rough patch.
Watch 3 Great Yet Underappreciated Vanguard ETFs for more from Daniel Sotiroff.
