New York — Amid the myriad of investment options that span across borders, the Schwab International Dividend Equity ETF (SCHY) differentiates itself by specifically targeting non-US stocks with a robust history of dividend payment. Launched in April 2021, this ETF seeks out high-yielding stocks from the Dow Jones ex-US Large Cap and Mid Cap indexes that have demonstrated a consistent dividend payout for at least ten years.
SCHY’s approach is methodical and detailed, deploying multiple stages of filters to select stocks. Initially, stocks must surpass certain market-cap and daily volume thresholds alongside a minimum indicated dividend yield that meets or exceeds the 40th percentile of its universe. Further analysis churns through multiple fundamental and volatility measures, evaluating each stock’s free cash flow to debt ratio, return on equity, overall dividend growth over five years, and more.
The ETF’s meticulous strategy funnels down its selections to the top 400 stocks based on a composite scoring system. Those making it to the final round encounter another review based on their three-year price volatility in USD terms, culminating in a tightly curated portfolio of 100 stocks. The selected stocks are then weighted on a float-adjusted market-cap basis, ensuring no single stock or sector overwhelms the fund’s balance.
However, despite SCHY’s intricate and multi-layered screening process aiming for quality and reduced volatility, it contrasts with the relative simplicity and broad reach of its competitor, the Vanguard International High Dividend Yield ETF (VYMI). Operating since 2016, VYMI commands over $8 billion in assets under management and encompasses a far wider range of over 1500 stocks. Its less comprehensive screening focuses primarily on identifying stocks forecasted to provide above-average dividend yields.
In terms of performance, the distinctions in methodology manifest in their respective standings. While both ETFs aim to deliver sound income streams to investors, VYMI has generally outperformed SCHY. SCHY, which originally distributed dividends semi-annually and has shifted to a quarterly schedule, has a turnover ratio five times that of VYMI, indicating potentially higher transaction costs and less stability due to more frequent trading.
A closer examination reveals that SCHY’s performance may suffer from its stringent criteria and portfolio limits. For instance, its cap on sector weights limits exposure to potentially higher-performing sectors. In particular, its underweight position in European financials, capped at 15%, compares unfavorably to VYMI’s 36% allocation. This has been a disadvantage in recent years, where despite stagnant European markets overall, European financial stocks have seen positive gains.
Moreover, an analysis of risk-adjusted returns underscores some concerns. SCHY has been challenged to generate returns exceeding the risk-free rate over the past three years, reflecting in less favorable Sharpe and Sortino ratios, which measure total and downside risks, respectively.
Investors might find current valuation levels an entry point, considering SCHY stocks currently showcase a price-to-earnings ratio significantly lower than the global average. For those confident in market cyclicality and mean reversion strategies, SCHY’s portfolio, arguably in an oversold position relative to its peers, might present a contrarian opportunity.
Ultimately, while SCHY’s rigorous approach to portfolio construction is commendable, potential investors should weigh the trade-offs of its complex strategy against simpler, broader offerings like VYMI that have demonstrated stronger historical performance and offer a potentially more straightforward value proposition. As always, alignment with individual investment goals and risk tolerance remains paramount when navigating the diverse landscape of international dividend-paying stocks.