DTH - DTH: A Quick Update Why After 6 Months It's Still A Sell

2023-09-25 17:55:37 ET

Summary

• I discuss the characteristics of the WisdomTree International High Dividend Fund, a high dividend fund that focuses on companies outside the United States.
• In the article, I compare the bond yields in the United States and Europe to the yield of DTH.
• Finally, I give my view about the stock market, highlighting that bond yields are currently more attractive.

This article is an update to my previous piece on the ETF. Specifically, in my prior article, I emphasized that there were more promising investment opportunities six months ago and outlined why the WisdomTree International High Dividend Fund ( DTH ) was not the optimal choice, even from a performance perspective. In this update, I will compare the ETF to the bond yields in both the United States and Europe. I will also explain why, if you intend to invest in the stock market, this may not be the best option at the moment.

ETF's Characteristics

DTH is a high dividend fund that focuses on companies outside the United States. According to the page dedicated to investors, 79.82% of the assets are companies with over $10 billion in capitalization, while mid-caps ($2 - $10 billion) and small-caps (<$2 billion) constitute 15.88% and 4.29% of the total assets, respectively.

For those wishing to delve deeper into the structure of the ETF, I provide the link to the page for investors from WisdomTree. Additionally, you can find the link to my previous article, where I summarize the most important characteristics that were useful for the analysis.

In general, compared to the last article, the holdings have remained more or less the same, changing only in terms of the percentage of assets under management.

Bond Yields: A Major Competitor for DTH

In my last article, I emphasized how inflation was a significant problem for DTH. In particular, considering a flat, if not negative, return, the yield return was negative in real terms. However, the problem for the ETF now is competition from bond yields.

The DTH yield is, in fact, 5.62%, which is an excellent return considering that inflation in the EURO area was at 5.2% in August, and inflation in the United States was at 3.7% in the same month. In fact, the return is positive for both those who invest using Europe as a reference market and those who invest in the United States.

However, bond yields are much more attractive at the moment. Making a quick comparison, 1-year yields in the Eurozone are currently at 3.76%, while 10-year yields are logically lower at 2.77%. In the United States, 1-year yields have even reached 5.48%, with 10-year yields at 4.48%.

It seems very obvious to me, so to prove my point: for more or less the same return, it is preferable to invest in the lower-risk instrument! In fact, if the time horizon of my investment were, for example, 5 years, I believe that most people would agree with me that it is better to have a fixed yield of 4.59% (data updated at the date of writing of the article for US5Y) than a 5.62% return, with possible drawdowns in a very complex geopolitical and economic scenario.

Furthermore, by doing simple mathematics, the returns, based on today's data, are positive (I take the example of 5 years, with a medium to long-term investment perspective), with a safe real return of 4.59% - 3.7% = 1.29%.

The Condition of the Stock Market

Although the economy is holding up well, with data that appear to be positive both in terms of consumption and job market, there are some concerns that currently lead me to prefer safer investments.

Firstly, both the FED and the ECB do not seem to have finished increasing interest rates; perhaps the FED has, but certainly not Europe, where the majority of the ETF's assets are concentrated. The fact that the real economy has not yet exhibited negative effects in terms of consumption and economic growth (in fact, the Eurozone is showing a slight recession, but without worrying data, in my opinion, up to now) makes me think of a rhetoric very similar to that of 2000, 2008, and 2018. In those years, despite the supporting economic data, the stock sector reacted negatively "late" compared to the peak of interest rates when everyone was convinced that both the market and the economy could hold well.

This time, I don't think it will be any different. So, while we probably won't witness a dramatic market collapse, we could still see some drawdowns over the next year, along with prolonged volatility.

Bottom Line

Returning to the discussion above, at the moment, from my perspective, a risk-free investment is preferable to a purely equity-based one, especially if the returns are likely to be similar.

Logically, I don't have a crystal ball, and this is just my overall view. However, I believe we can agree that given the current macroeconomic and geopolitical scenario, it is better to be cautious in terms of risk.

Precisely for this reason, I consider DTH a “Sell”: with the same level of return and investment goals, the markets certainly offer better and more suitable tools for diversification.

For further details see: