DNL - DNL: A Diversified Large-Cap Global Equity ETF Generating Strong Returns

2023-04-28 17:48:53 ET

Summary

• WisdomTree Global ex-U.S. Quality Dividend Growth Fund ETF has a relatively large asset base, decent expense ratio, offers quarterly pay-out, and has been generating decent average yield since the last ten years.
• Overall, top holdings of the DNL ETF’s portfolio from both EM and developed markets performed well during the short run and the long run.
• DNL generated strong total return over the long run. Its portfolio is deeply diversified and carries a low level of risk and is trading at par with its NAV.
• Portfolio's composition reflects DNL’s preference for stocks from economies with superior credit ratings, and it intends to hold its investments for long.

~ by Snehasish Chaudhuri, MBA (Finance)

WisdomTree Global ex-U.S. Quality Dividend Growth Fund ETF ( DNL ) is an exchange-traded fund ("ETF") that benchmarks its performance against WisdomTree Global ex-U.S. Quality Dividend Growth Index. The index is a fundamentally weighted index that comprises dividend-paying global ex-U.S. common stocks with growth characteristics. DNL comprises almost 300 equity stocks that are selected through represented sampling techniques.

This fund was launched by WisdomTree Investments, Inc. and is co-managed by Mellon Investments Corporation and WisdomTree Asset Management, Inc. DNL invests in dividend-paying value stocks of large-cap companies, listed in various stock markets outside the United States. DNL generates a decent yield, but its total return is strong enough during the long run. The WisdomTree Global ex-U.S. Quality Dividend Growth Fund ETF is currently trading at $35.83, at par with its NAV.

DNL Composition and Yield

WisdomTree Global ex-US Qual Div Gr ETF provides exposure to dividend-growing companies with quality and growth characteristics, belonging to some targeted developed international and emerging markets. This fund does not invest in the U.S. market. Among the emerging markets, DNL invests primarily in India, Taiwan, Hong Kong, and China. These four markets are undoubtedly the most promising and least risky among all the emerging economies. More than one-fourth of its assets are invested in these markets.

More than 15 percent of the WisdomTree Global ex-U.S. Quality Dividend Growth Fund ETF is invested in stocks from the United Kingdom. Among the developed markets, the United Kingdom and Canada account for almost one-fifth of its total assets, and another 50 percent of its assets is invested in the stock markets of Switzerland, France, Netherlands, Germany, Denmark, Sweden, Japan, and Australia. All these markets, although witnessing a relatively lower growth rate, are having best of credit rating for their sovereign bonds. All these economies are safe bets, as none of them are facing any major political, social, or economic crisis. An interesting thing about DNL is that despite investing in so many markets, its expense ratio is comparatively low at 0.42 percent.

WisdomTree Global ex-U.S. Quality Dividend Growth Fund ETF has an asset base of $553 million. Almost 60 percent of its assets are invested in equities from four sectors - information & communication technology ((ICT)), healthcare, industrial and financial. I expect these four sectors to generate higher-than-average growth in the coming decade due to their primary focus on innovative technologies. Moreover, those four emerging economies are also deriving their growth primarily from these sectors. Its investments in the remaining sectors are providing stability to its portfolio, despite generating relatively low-price growth.

Historically, the fund has been quite stable, too. DNL was formed in 2006 and has been paying quarterly dividends since 2009. Year-end yield in 2022 was 4.82 percent, and trailing-twelve months yield stood at 3.8 percent.

Major Holdings of DNL's Portfolio Performed Well During Both the Short and Long Run

Major holdings from those four emerging markets included Taiwan Semiconductor Manufacturing Company Limited ( TSM ), Tencent Holdings Limited ( TCEHY ), Infosys Limited ( INFY ), Hong Kong Exchanges and Clearing Limited ( HKXCF ), and Tata Consultancy Services Limited - all belonging to technology and financial sector. Top holdings in the United Kingdom included Imperial Brands PLC ( IMBBY ), Unilever PLC ( UNLYF ), GSK plc ( GSK ), Diageo plc ( DGEAF ), and RELX PLC ( RLXXF ) - mostly belonging to the consumer staples and consumer discretionary segments. Top 10 investments in developed equity markets outside the U.K. included LVMH Moët Hennessy - Louis Vuitton, Société Européenne ( LVMHF ), Nestlé S.A. ( NSRGY ), Novo Nordisk A/S ( NONOF ), ASML Holding N.V. ( ASML ), SAP SE ( SAP ), ABB Ltd ( ABB ), Kering SA ( PPRUF ), CSL Limited ( CSLLY ), KONE Oyj ( KNYJF ), and adidas AG (ADDYY).

Barring IMBBY and INFY, all other 18 stocks grew between 10 percent and 75 percent during the past six months. INFY in particular is going through a rough patch, and its stock has suffered due to various factors such as constant currency growth, declining margins, unplanned ramp-down in projects across business verticals, and the SVB (SIVBQ) collapse. On the other hand, IMBBY has been consistently underperforming. Since the initiation of this fund in June 2006, IMBBY has lost almost 20 percent of its value. KNYJF and GSK also posted negative price growth. All other stocks posted price growth in excess of 160 percent.

So, overall top holdings of DNL's portfolio performed well both during the immediate short run and during the long run. WisdomTree Global ex-U.S. Quality Dividend Growth Fund ETF's total return was also quite impressive. Between 2016 and 2021, average annual total return stood at around 15.2 percent. During the past six months, the total return was more than 25 percent. So far, economies worldwide have remained subdued, and the business environment remained challenging. Resumption of robust growth so far remains a desire. Factoring in the macroeconomic situation, DNL's performance has been quite remarkable.

DNL Seems Attractive According to My "7 Factor Model for Evaluating Global Funds"

By applying the "7 Factor Model for Evaluating a Global Fund", I try to find out whether the stock qualifies with respect to some minimum requirements such as a current market price of $5, assets under management ("AUM") of $200 million, yield of 4 percent, and diversification of its investments among eight major sectors - technology, financial, healthcare, industrial, consumer products, energy & materials, real estate, and utilities. WisdomTree Global ex-U.S. Quality Dividend Growth Fund ETF has a significantly large asset base, qualifies for the minimum requirements with respect to stock price, and has been generating a decent average yield since the last ten years. The fund has generated strong total returns over the long run. Its portfolio is diversified within various sectors and carries a low level of risk.

I will try to measure the attractiveness of the fund by applying three more factors - the current level of discount from its NAV, portfolio risk, and the probability of sustaining its current yield. WisdomTree Global ex-U.S. Quality Dividend Growth Fund ETF is currently trading at par with its NAV. Portfolio's composition reflects its preference for economies with superior credit ratings. Within the emerging markets, DNL has invested only in the markets with investment grade sovereign bond ratings. Its portfolio is composed of large-cap and mid-cap stocks and tends to hold its investments for a longer period of time.

In my opinion, WisdomTree Global ex-U.S. Quality Dividend Growth Fund ETF is suitable for growth-seeking investors, as the annual average total return is quite impressive. It is also appropriate for income-seeking investors for its consistent and decent yield, which I find very much sustainable.

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