While the resurgence of American industry and business is certainly laudable, the rest of the international community is not being left behind completely. In fact, an ETF argument can be made that the rising tide is lifting all boats, and that the international business climate may even be outperforming the US. No, it’s not the Twilight Zone. Based on market price at the time of this writing, submit for your consideration this phenomenon: The Vanguard International High Dividend Yield Index Fund ETF Shares (NASDAQ: VYMI) is actually paying a point more in both dividend yield and on year-to-date returns over Vanguard High Dividend Yield Index Fund ETF Shares (NYSE: VYM).
US Vs. The Rest Of The World
The US is a global financial market leader, but certain international combinations can rival its performance.
Using a comparison metric of established, large-cap dividend paying stocks from financial, energy, biotech and other industries and omitting high tech companies, VYMI’s trend outperforms VYM not only in terms of current yield and YTD return, but also in 1 and 5-year returns. A side-by-side comparison shows that US investors may be leaving money on the table by the prevalent stance of eschewing exposure to international investments:
| VYM | VYMI | |
| Yield | 2.21% | 3.42% |
| YTD Return | 11.58% | 12.56% |
| 1-Year Return | 25.30% | 31.64% |
| 5-Year Cumulative Return | 72.65% | 80.1% |
| 10-Year Cumulative Return | 206.61% | 183% |
| Total Return from Inception | 476.37% (19 years) | 192.81% (from Feb. 2016) |
| Net Assets | $96.06 billion | $20.46 billion |
| 52-week Range | $129.11-$161.46 | $77.46-$101.96 |
| Average Daily Volume | 1.25 million shares | 1.019 million shares |
| Expense Ratio | 0.04% | 0.07% |
| NAV | $158.22 | $99.15 |
Top 5 Holdings:
| VYM | VYMI |
| Broadcom: 8.49% | HSBC Holdings: 1.74% |
| JP Morgan Chase: 3.13% | Roche Holdings: 1.59% |
| Exxon Mobil: 2.52% | Novartis AG: 1.56% |
| Johnson & Johnson: 2.23% | Royal Bank of Canada: 1.45% |
| Cisco Systems: 1.97% | Nestlé S.A. : 1.41% |
While VYM outpaces VYMI over a 10-year duration at present, VYMI’s superior 1-year +5.3% and 5-year +7.5% performance could add up to a significant difference if the trend holds over the long term.
VYMI Hurdles For US Investors
In a debate over an ETF like VYMI, the advantages of international portfolio exposure outweight the negatives if one can handle the extra accounting and currency monitoring for best results.
Despite VYMI’s evidence of value added to any portfolio seeking diversification, there are objections, both legitimate and overblown, that many US investors may have. Some of these include:
- Currency Risk: while currency valuations are a valid concern, the present overall weakness trend of the US dollar actually makes a stronger case for international exposure, since the result is more US dollars for any unhedged returns. Of course, if the US dollar starts to get stronger, then the opposite would hold.
- Slower Growth in Overseas Markets: this is a misperception, as international markets vary widely, so the specific examples in question are crucial to review. For example, Korean markets are surging, primarily due to Samsung and SK Hynix being so predominant in the memory chip sector. Other international markets may lag as a result of the oil shipping bottleneck caused by the Iran War.
- Withholding Taxes: The 15% foreign withholding tax is a legitimate objection. However, it is offset by foreign tax credits (IRS Form 1116) that can recover the difference, but it does entail additional paperwork filing. It’s an accounting inconvenience that may dissuade some investors.
While VYM is certainly a viable long-term ETF to hold for many investors seeking growth and income, an allocation of up to 40% of VYMI might not be a bad idea for investors predisposed to want international exposure. The dividend yield advantage can be the benchmark, and VYMI’s future performance and the relative strength of the US dollar would be the variables to watch to decide whether to hold or sell.
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