Monday, April 17, 2006

International ETF's; whats on the menu?

Thanks to exchange traded funds investor's now have a quick, easy and cheap access to foreign stock markets. The biggest non-US ETFs are iShares MSCI EAFE Index Fund (EFA) [14.87B] and iShares MSCI Emerging Markets (EEM) [9.09B]. Unfortunately most foreign ETFs (except for Vanguard VIPERs) charge heavy management fee's, generally north of 0.60%. This is still much cheaper than normal mutual funds targeting a "specialty" area such as international stocks.

Somewhat more specialized than the broad market ETFs are a gaggle of single country funds from iShares, and more broad geographic funds (Europe, Asia ex-Japan, Latin America). The only differentiated international ETF's have been the iShares MSCI EAFE Value Index (EFV), iShares MSCI EAFE Growth Index (EFG), and Powershares International Dividend Achievers (PID). I love PID, and I think everyone must own it. Note that I said "must", not "should"; everyone must own PID.

Right now PowerShares is the only player for investors seeking international dividends for income and as a hedge against the decline of the dollar. That is going to change "real soon now" as WisdomTree has filed with the SEC for 20 dividend ETFs. Wisdomtree has proposed to create universes of dividend paying stocks from United States and the rest of the world. This indices will be weighted based on dividends paid in proportion to the total dividends available in the universe, a similar methodology to the Morningstar Dividend Leaders Index Fund (FDL) from First Trust. Morningstar has published a white paper on their available dividends index method.

What is most interesting about the proposed International Dividend funds from WisdomTree is that they plan to slice the non-US universe into regions (Europe, EFA, Japan, Pacific ex-JP) and market cap tranches. When the WisdomTree ETFs get listed, investors who want exposure to small cap Japanese companies that pay dividends can do so. These dividend funds will be the first funds to offer explicit small-cap and mid-cap international exposure. The requirement that companies pay dividends will act a screen against immature companies with weak cash flow and will give the indexes a value bias. I predict that these WisdomTree ETFs will become very popular with investors and be an essential part of a balanced portfolio


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