UUP - IHDG: The Dollar's Rise Isn't Hurting This Dividend Growth ETF (Rating Upgrade)

2024-01-19 02:15:39 ET

Summary

• The US Dollar Index has rebounded, putting pressure on multinational domestic firms and companies based abroad.
• The WisdomTree International Hedged Quality Dividend Growth Fund is a currency-hedged ETF that can mitigate foreign exchange risk.
• IHDG has improved technicals and relative valuation, making it an attractive investment option.
• I highlight key price levels to watch during the often-troubled first quarter.

The US Dollar Index has gone on a wild ride over the past six months. The DXY, which is heavily weighted to changes in the EUR/USD pair, declined sharply from a peak near the 107 mark in Q4 last year. That was a massive tailwind for global stocks, helping to lift the ex-US equity index to a solid 2023 total return despite plenty of volatility along the way. The script flipped as the calendar also flipped into 2024, however. The DXY has rebounded to above 103, pressuring both multinational domestic firms and companies based abroad.

One way to back out this apparent foreign exchange risk is to seek currency-hedged products. One such ETF is the WisdomTree International Hedged Quality Dividend Growth Fund ( IHDG ). Following a return that was about on par with that of the S&P 500’s over the final handful of months last year, I am upgrading the fund based on relative valuation and improved technicals.

US Dollar Index Rallying As 2024 Gets Going

According to the issuer , IHDG seeks to track the price and yield performance, before fees and expenses, of the WisdomTree International Hedged Quality Dividend Growth Index. The ETF sports the benefits of accessing global dividend-growing firms using quality and growth criteria, a currency hedge to reduce currency risk, and its potential as a complement to or replacement for high-yield or large-cap strategies, while also managing currency fluctuations against the US dollar.

Ranked number 2 out of 17 in its ETF Sub Class , IHDG is a moderate-sized ETF with $2.0 billion in assets under management as of January 17, 2024. Share-price momentum has improved over the past three and six months, and I will detail later why the technical view has evolved to be more sanguine. The fund’s annual expense ratio is moderate at 0.58%, but investors should bear in mind that the fee includes currency-hedging operations, which has the benefit of being able to dampen overall volatility. With a dividend yield now above 1.7%, the ETF earns a solid B ETF Grade by Seeking Alpha. Risk , meanwhile, is somewhat low given its annual standard deviation and diversified portfolio allocation. Finally, liquidity with IHDG is very strong considering its average daily trading volume of more than 230,000 shares and a median 30-day bid/ask spread of just two basis points.

Digging into the portfolio, IHDG is primarily a large-cap-focused ETF. Just 19% of the allocation is considered small or mid-cap in size. The 5-star, Bronze-rated fund by Morningstar features a modest price-to-earnings ratio of just 16.6 while long-term earnings growth on the fund’s holdings has averaged a solid 9.8%, making for an attractive PEG ratio. Earnings quality is also high based on the factor view.

IHDG: Portfolio & Factor Profiles

IHDG is diversified across sectors and with its mix of top 10 holdings. No single area of the market represents more than 20%, though Health Care, Consumer Discretionary, and Industrials are overweights while the Information Technology sector is a material underweight compared to its portion of the S&P 500. Being a non-US fund, investors should compare returns to the all-country world ex-US index. Overall, the top 10 stocks comprise just 33.5% of the fund, also helping to reduce overall risk. Finally, dividend investors should appreciate IHDG’s 5-year dividend growth rate above 63%.

IHDG: Holdings & Dividend Information

Seasonally, IHDG has tended to see some volatility during the first quarter, according to data from Equity Clock . The ETF has historically then rallied during the final two weeks of Q1 through July. Thus, I assert that prospective investors be careful with their entries over the coming two months and be opportunistic on pullbacks.

IHDG: Q1 Struggles, Robust Q2 Trends

The Technical Take

With an attractive valuation, improved momentum, and a diversified foreign equity allocation, the chart situation appears strong in my view. Notice in the graph below that shares rallied through what was key resistance just above the $40 level. Before that breakout, IHDG was mired in a steep downtrend off a double-top high in late 2021. The $47 level proved to be tough resistance, and a more than 20% bear market took place into the fall of 2022. The fund stabilized in the mid-$30s and eventually rose through its long-term 200-day moving average. Today, the 200dma is positively sloped with price above that trend indicator line. A bullish golden cross pattern occurred last month, too.

With a high amount of volume by price between $36 and $40, pullbacks should be met with ample buying demand. It is not all rosy, however. Take a look at the RSI momentum indicator at the top of the graph – a bearish divergence between momentum and price has taken place in the last few weeks. So, I assert that buying the dip toward $41 support is a prudent play. Based on the height of an ascending triangle pattern ($5.50), an upside measured move price objective to near $46 is in play.

Overall, I see technical upside potential for IHDG. There’s clear support on the chart, though bearish RSI divergence is a risk.

IHDG: Shares Rally Through Resistance, RSI Momentum Turns Softer

The Bottom Line

I am upgrading IHDG from a hold to a buy. I see improved momentum and technical strength today. The fund’s focus on quality dividend growth companies outside of the US, while hedging key currency risk, is appealing right now.

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