DTH - DTH: There Are Better Investments Right Now

2023-03-30 02:50:23 ET

Summary

• DTH is a large-cap investment style ETF that focuses on value and high-dividend companies outside of the United States and Canada.
• I expect the ETF to be more volatile in the medium term.
• Risk-free investments that offer attractive interest rates pose a threat to DTH right now.
• The ETF is a sell as there are better risk-adjusted investments right now.

The WisdomTree International High Dividend Fund (NYSEARCA: DTH ) is a large-cap investment style ETF that focuses on value and high-dividend companies outside of the United States and Canada. Since its inception date, the ETF has delivered relatively flat performance with an average dividend yield of between 5% and 6%. Over the last year, the ETF has faced significant challenges due to market volatility and, above all, inflation. Furthermore, the current presence of risk-free bonds that offer very attractive coupons has made DTH no longer the first choice for those seeking income and reduced investment risk.

ETF’s characteristics

DTH is an ETF that invests in companies outside of the US and Canada, with a focus on high-dividend companies in the financials, energy, and materials sectors. The major companies in the index include BHP Group Ltd (5.59%), Novartis AG (3.34%), TotalEnergies (2.90%), Rio Tinto Plc (2.41%), and HSBC Holdings PLC (2.03%). In terms of capitalization, 79.05% of companies are Large Cap, 16.63% are Mid Cap, and only 4.31% are Small Cap (with a capitalization of less than $2 billion).

The ETF has significant exposure to Europe, with the United Kingdom (15.17%), Australia (15.16%), and Japan (11.93%) being the top countries represented. Other important countries in the Eurozone such as France, Germany, Spain, and Italy are also well represented.

In terms of sectors, the ETF has a significant exposure to the banking sector, which alone makes up 24.09% of the weight of the ETF, followed by the materials sector (15.49%).

However, the banking sector has been under a lot of pressure in recent weeks due to the issues concerning SVB and Credit Suisse, which have raised concerns about the strength of some of the sector’s players. Given that the situation in my view could continue to weigh on the performance of the financial sector, I expect the ETF to be more volatile in the medium term as a result.

Inflation is the DTH's Achilles heel

One of the underlying issues with the DTH ETF that immediately catches the eye concerns the current macroeconomic context. Looking at the performance record since its inception in 2006, the returns have been pretty flat. In fact, the main attraction for the ETF logically remains its dividend yield, currently at 5.40%, while the companies that compose it are certainly not of the growth type. Just do some quick math to understand that flat returns and a 5.40% yield are not enough to combat the eroding power of inflation, which is currently at 6.00% in the US.

The DTH ETF has risks associated with investing in shares. It's important to remember that investing in high dividend stocks is not necessarily safer, despite the common belief. In fact, it's not necessarily true that the higher the dividend, the safer the company that offers it is! Therefore, it may be more interesting to invest in a completely risk-free instrument such as a 1-year US Treasury, which currently has a yield of 4.55%.

The difference in yield between the two types of investments, DTH on the one hand and Treasuries on the other, is only 0.85%. In my opinion, this makes the latter much more interesting, as it avoids a possible loss due to a situation of uncertainty and volatility in the markets.

To be more precise, since the DTH ETF has geographic exposure beyond the US, we can compare the 1-year bond yields of its major constituents. The yield on the UK 1-year bond is 3.98%, while that of the Eurozone is almost 3%. Again, since my medium-term view is bearish on the banking sector and the ETF may be more volatile in the coming months, I am inclined to prefer short-term bonds.

DTH's performance

From a performance point of view, DTH has not performed excellently. Excluding the dividend, it has lost 14.90% over the past 5 years, against a positive performance by most of the major indexes. The chart below compares DTH with the performance of SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) (+51.98%), WRD (HSBC MSCI World) (+51.19%), and SXXP (Stoxx 600) (+21.39%).

However, in the last year, DTH performed better than SPY and WRD with a performance of -7.42%, which, if adjusted for the dividend of approximately 5.40%, coincides with that of the STOXX 600. Therefore, in the last year, DTH has followed the trend of European large-cap shares.

Looking at the annual performance results of DTH since 2006, it can be seen that, although the world indices have performed very well apart from periods of crisis, more than half of the years have been negative for DTH. This has marked the underperformance of the ETF since its inception.

Another thing that catches the eye is the volatility of DTH, which has always been very similar to that of the indexes mentioned earlier. In fact, although the SPY contains companies much more oriented towards growth (therefore generally riskier), DTH has more or less always suffered the same drawdowns in terms of percentage, with a beta almost always equal to 1.00.

Therefore, the ETF does not appear to be very efficient from a risk-adjusted return perspective. For example, looking at some metrics, we can immediately see how the Sharpe ratio of the last 10 years has been really low (0.25), and the same can be said for similar ETFs (0.12). Also, looking at the alpha, we can see how the ETF performed better than its peers, but in general, it offered very poor returns.

For this reason, I consider the ETF to be very inefficient from a risk-adjusted return point of view. Below there is a comparison of the performance of a similar but low-volatility ETF: the SPHD (NYSEARCA: SPHD ) (Invesco S&P 500 High Dividend Low Volatility ETF). The SPHD has a slightly lower average dividend (around 4.0-4.5% on average), but it offers better risk-adjusted returns and much better performance over the last 5 years (+4.65% against -14.94%). In addition, the Sharpe ratio in the last 10 years is 0.61.

In conclusion

Bottom line, it's up to the investor to decide where it seems more prudent or profitable to invest money. However, I remain of the opinion that, at the moment, it is much more interesting to invest in a risk-free asset or in an ETF that has a high yield but low volatility. Indeed, DTH is very inefficient from the point of view of income and capital preservation, which should be its main purpose. On the other hand, DTH can be an interesting choice for investors seeking geographic diversification in their portfolio. However, in this case, I believe that high yield and low volatility ETFs are more appropriate. Considering all these factors, I give a "Sell" rating to DTH ETF as there are currently more efficient risk-adjusted ways to invest money.

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