UNLYF - IGRO: Low Maintenance But High Quality

Summary

• IGRO's performance has been primarily driven by bad performance in European markets.
• Substantial financial exposure is favorable in a rate hike environment.
• Moreover, aristocratic, blue chip yield exposures should be appreciated by income investors.
• Its portfolio is rather recession resistant, we think it's worth a look, although it's too broad for us.

The iShares International Dividend Growth ETF ( IGRO ) hasn't performed so well this year despite many European blue-chip names gracing its allocations. Those dividends are certainly solid, and the sectoral exposures are pretty resilient to macro risks. Moreover, financial exposures benefit in an environment where rates are rising. The relatively weak performance is just because the portfolio is exposed to non-US markets which have generally taken the macro environment more seriously in equity market allocation decisions. Overall, it looks like a decent set of exposures, except for its premium to NAV. For income investors it might be interesting, but it's too broad for us.

IGRO Breakdown

Let's have a look at a couple of the top IGRO holdings .

Some very blue-chip names appear. Nestlé (NSRGY) owns a large host of European consumer brands, but even has some smaller healthcare exposures. They bought Aimmune Therapeutics and other small-scale pharma players in the past. It is a total aristocrat from a dividend point of view.

Below it are Roche (RHHBY), which is maybe slightly beleaguered on COVID-19 reversal effects, Unilever ( UL ) which is another straight consumer products company, Novartis ( NVS ) again for more healthcare exposures, and then some banks and utilities.

On a sectoral basis, we get the following.

Financials are attractive right now as rate hikes improve lending conditions. This is great because even if a high rate regime doesn't last that long, the duration gap can be bolstered before the rates might again fall. In the meantime, the savings rates are lagging rate hikes completely, so net interest margin growth will be a driver of banks' fundamental performance for the first time in a long time.

Healthcare and consumer staples are both relatively resilient, which is good to see. Utilities are also resilient. So decent direction in select sectors has been captured with about 65% of the portfolio.

Remarks

The geographic breakdown is the following: no US stocks.

Japan features highly, and their accommodative stance and Yen risk mitigates a little of the benefits in IGRO's financials allocation, since some of the included banks are Japanese. Canadian banks are featured heavily though, and their conditions should mirror the US' quite closely. Besides those two, the rest are vaguely European exposures. Switzerland is only featured highly because technically many important equities trade on those exchanges. The Swiss consumer market isn't that big.

The skew away from US stocks explains the performance YTD of -16%. US stocks have almost recaptured pre-invasion levels which is crazy. European markets are much more sober. The yield is 2.53% on a 0.15% cost ETF, and it is covered well by companies that are total stalwarts, in many cases aristocrats too. So not bad at all for the conservative dividend investor. The PE is pretty low at 13x. The consumer staples exposures might be exposed to some downtrading, but they have pricing to mitigate some volume effects. Financials and healthcare are simply strong in the current environment. Utility is levered to the high prices in commodities and energy. Industrials will be more exposed to cost-push inflation. But altogether, with major exposures well positioned, a 13x comprehensive PE looks pretty low, and offers a decent spread over reference rates for equity exposure to strong European names. Overall, IGRO looks like a smart way for the diversified investor to play value, meaning playing away from the US. However, we're not buyers, it's just too diversified!

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