The U.S. stock markets have taken a beating this year, but there are some markets around the world that are up in 2022. That’s why a good diversification strategy is so important, as it provides you with a variety of investments that don’t all move in sync. International or global investments are an essential part of a well-diversified portfolio.
While it can be daunting to identify good international stocks, an exchange-traded fund (ETF) that tracks international markets might be more preferable for some investors. Two popular international ETFs that have outperformed U.S. markets this year are the iShares MSCI EAFE Value ETF (NYSEMKT: EFV) and the Legg Mason International Low Volatility High Dividend ETF (NYSEMKT: LVHI). Which is the better buy?
iShares MSCI EAFE Value Index ETF
The iShares MSCI EAFE Value Index ETF is the far bigger of the two funds, with about $16 billion in net assets. This ETF tracks the MSCI EAFE Value Index, which includes large- and mid-cap stocks within the larger MSCI EAFE Index that exhibit value characteristics as determined by book value-to-price, 12-month forward earnings-to-price, and dividend yield.
The holdings include stocks from various developed international markets across Europe, Asia, and the Far East, but not stocks from the U.S. and Canada. About 22% of the holdings are from Japan and 19% are from the U.K., while Germany and France have about 10% each.
Overall, the ETF holds about 500 stocks. The three largest are Shell PLC, Novartis AG, and Toyota Motor Corp. The portfolio has a P/E ratio of 10.6.
The ETF is roughly even year to date as of May 27. Over the past year as of April 30 it is down 4.5%. It has an annualized return of 2.4% over the last five years and 4.4% over the past 10 years as of April 30. It also has an expense ratio of 0.35%.
Legg Mason International Low Volatility High Dividend ETF
The Legg Mason International Low Volatility High Dividend ETF is a newer offering, launched in 2016. It tracks the QS International Low Volatility High Dividend Hedged Index, which is based on the MSCI World ex-US IMI Index. However, it screens for profitable companies that have the potential to pay relatively high sustainable dividend yields. These stocks are then ranked based on their price and earnings volatility, with no stock weighted higher than 2.5%, no sector exceeding 25%, and no country exceeding 15%. Through these screens, it whittles nearly 3,500 stocks down to about 99.
About 15% of the holdings come from Japan, while 14% come from the U.K. and 9% each come from Canada and Switzerland. The three largest holdings are Ibderdrola SA, Nippon Telegraph and Telephone, and Novartis. The portfolio has a price-to-earnings (P/E) ratio of 10.9.
The ETF is up about 5% year to date as of May 27. Over the past one-year period as of April 30, it is up 12.4%. It has an annualized return of 5.7% over the last five years and 7% since inception in 2016. It has an expense ratio of 0.40%.
Which is the better buy?
Both of these funds have outperformed the major U.S. market indexes this year, so they would make solid diversifiers in this type of market. However, over the long term, neither one has had great performance.
If I were to go with one of these, it would probably be the Legg Mason International Low Volatility High Dividend ETF. It has only been around for five years, but it has better returns across the board than the iShares ETF. It also has a similar expense ratio and similar P/E and pays out a good dividend.
While it is a much more concentrated portfolio with about 99 stocks, it seeks out those that are less volatile, which limits the risk.
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