ETF Overview

Vanguard International Dividend Appreciation ETF (VIGI) includes a portfolio of large and giant-cap international dividend growth stocks. Its exposure to large-cap and giant-cap stocks is beneficial because these stocks have better balance sheets to weather the storm caused by COVID-19. Most of the countries that VIGI has exposure to are markets that have passed the peak of the pandemic or have done better jobs containing COVID-19 than the U.S. Stocks in VIGI’s portfolio will benefit from fiscal and monetary policies of major governments and central banks around the world. Therefore, we think this is a good fund to own especially in this time of uncertainty.

Chart

Data by YCharts

Fund Analysis

VIGI selects stocks from the Nasdaq International Dividend Achievers Select Index. It basically includes stocks in the Nasdaq Global Ex-U.S. Index that has increased their dividends for 7 consecutive years. For a detailed discussion on this approach, its strengths and its weaknesses, please read our previous article here.

A diversified portfolio of over 400 large-cap and giant-cap stocks

As can be seen from the table below, about 61.8% and 22% of its stocks are giant-cap and large-cap stocks respectively. Large-cap and giant-cap stocks tend to have better financial resources than their smaller peers. This is very important especially in the current economic downturn caused by COVID-19. This is because the current recession caused by the outbreak of COVID-19 can last for a while and many suspect that there will be multiple waves of pandemic in the second half of 2020 and 2021. Hence, we may see some countries reintroduce their lockdown measures if another wave of pandemic arrives. Therefore, VIGI’s portfolio of stocks that have strong balance sheets will be crucial.

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Source: Morningstar

VIGI’s portfolio of stocks are mostly located in countries that have now passed the peak of the pandemic

Stocks in VIGI’s portfolio are mostly located in countries that have done much better jobs in containing the virus. As can be seen from the table of VIGI’s top 10 countries by market allocation, only India is still facing record number of new cases daily. Other countries such as Switzerland, France, U.K., Canada, Germany, and Netherlands have already passed the peak of the pandemic. Therefore, stocks in VIGI’s portfolio should not see any major interruptions in their operations in the near term. Many stocks in VIGI’s portfolio may even benefit from recoveries of economic activities in the countries where they are located.

Source: Vanguard Website

Monetary and fiscal policies of these countries will help support VIGI’s valuation

While the pandemic has caused much chaos to the world economy, monetary and fiscal policies introduced by the world’s largest central banks and governments have the potential to create an environment that push the valuation of quality stocks higher. We think VIGI’s portfolio of quality stocks with consecutive years of dividend growth will benefit from these governments’ policies. As the chart below shows, governments around the world have unleashed financial supports, aids, and loans that represent about 15% – 45% of their GDPs. These stimulus packages should help individuals and businesses to weather the impact of the health crisis in the near term and ensure a robust recovery.

Source: RBC Economics

Besides many governments’ fiscal policies, major central banks around the world have also introduced monetary policies to support the capital markets. Not only that they have cut their rates to record low levels (near 0% for most developed nations, and historically low level for emerging countries), they have also expanded their balance sheets through quantitative easings also known as QE. These central banks are likely to continue to expand their balance sheets by purchasing treasuries or bonds (in some cases even equities such as Bank of Japan’s equity purchase). These measures have injected a lot of money to the bond market and has the potential to push the valuation of equities higher as investors need to find quality income assets. Given the fact that stocks in VIGI’s portfolio are quality dividend growth stocks with good track records of dividend growth, their valuations will likely be pushed higher.

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Source: RBC Economics

VIGI is trading at a discount to other U.S. dividend growth stocks

Below is a table that compares the valuation of VIGI to Vanguard Dividend Appreciation ETF (VIG). For reader’s information, VIG invests in dividend growth stocks in the U.S. with 10 consecutive years of dividend growth. For a detailed analysis of VIG, please read our article here. As can be seen from the table below, VIGI’s P/E ratio of 22.7x is below VIG’s 25x. Similarly, VIGI’s P/B ratio of 3.4x is also below VIG’s 4.6x. On the other hand, VIGI has a better earnings growth rate of 11.4% than VIG’s 9%. VIGI has higher expense ratio of 0.20% than VIG’s 0.06%. This is understandable as it generally costs a bit more to manage a portfolio of international stocks than a portfolio of stocks that trades in the U.S.

VIGI

VIG

P/E Ratio

22.7x

25x

P/B Ratio

3.4x

4.6x

Earnings Growth Rate (%)

11.4%

9%

Expense Ratio (%)

0.20%

0.06%

Source: Created by author

Risks and Challenges

Volatility in emerging markets

About 24.1% of VIGI’s portfolio of stocks are located in emerging markets. While emerging markets tend to have above average economic growth rates than other developed nations, these markets are also much more volatile. Therefore, investors should also expect some volatility.

Multiple waves of pandemic

While the economic downturn may have bottomed in many developed countries thanks to their efforts to contain the virus, there may be another wave of pandemic if people are not careful enough. If another wave of pandemic arrives, massive lockdowns may be reintroduced and economic activities in these countries will be negatively impacted again.

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Investor Takeaway

VIGI has a portfolio of quality international dividend stocks and it is trading at an attractive valuation. Therefore, we think this is a good choice for dividend growth investors that want some exposure to international markets.

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.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.



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