VIGI - VIGI: A Good Relative Trade During A Credit Event

2023-08-15 12:41:52 ET

Summary

• Vanguard International Dividend Appreciation Index Fund ETF Shares is an ETF that tracks the performance of the NASDAQ International Dividend Achievers Select Index, offering a balance of growth and income.
• VIGI falls under the category of smart beta ETFs, which aim to outperform the market through strategic stock selection based on dividend growth.
• VIGI is not immune to downside risk, with a strong inverse correlation with the U.S. dollar and exposure to emerging markets.

“The only defense against the world is a thorough knowledge of it.” - John Locke.

Vanguard International Dividend Appreciation Index Fund ETF Shares (VIGI) is an exchange-traded fund, or ETF, designed to track the performance of the NASDAQ International Dividend Achievers Select Index. The fund includes a portfolio of large-cap international stocks that have shown consistent dividend growth over at least seven consecutive years. This focus on large-cap stocks and their reliability in dividend growth makes VIGI an enticing option for investors seeking a balance of growth and income.

Understanding Smart Beta ETFs

To comprehend what makes VIGI stand out, it's essential to understand the concept of smart beta ETFs. Traditional ETFs track market cap-weighted indexes, reflecting a specific market segment or the entire market. These are ideal for investors who have faith in market efficiency and want a low-cost way to replicate market returns.

However, smart beta ETFs offer an alternative for those seeking to outperform the market through strategic stock selection. These funds track non-cap-weighted strategies, aiming to pick stocks with a better chance of risk-return performance. These strategies may be based on equal-weighting, fundamental weighting, or volatility/momentum-based weighting, among others.

VIGI falls under the umbrella of smart beta ETFs, tracking non-cap-weighted strategies based on dividend growth.

This is a major plus in my view given just how concentrated "passive" indices have been in Technology names. Increasingly, investors are taking on not a diversified basket, but rather a portfolio that in reality is just a concentrated bet. When we look at the price ratio of VIGI to SPY, we can clearly see we are at a tradeable relative bottom.

VIGI's Downside Risk

Despite VIGI's focus on large-cap stocks and its history of consistent dividend growth, it's not immune to downside risk. The fund has a strong inverse correlation with the U.S. dollar, meaning that the fund's value may decrease when the U.S. dollar strengthens. This could become a problem in the near-term as I expect a flight-to-safety sequence that favors the dollar here.

Additionally, VIGI's exposure to emerging markets, although minimal, can inject an element of volatility into its performance. These markets account for about 9.5% of VIGI's total portfolio, with the rest being developed markets located in various regions of the world.

Fundamentals, Valuations, and Portfolio

VIGI's portfolio consists of 325 individual equities with a median market cap of $66.5 billion. Its largest holdings include Novo Nordisk A/s, Novartis Ag, and Nestle. The fund also boasts an EPS growth rate of 9.1% and a P/E of 22.2, signaling potential for growth (hopefully).

Conclusion

VIGI presents an interesting option for investors seeking international exposure combined with consistent dividend growth. However, I view this much more as a relative strength trade given increased vulnerability in the tech sector and equities more broadly. I like the sector composition and think in general this is a good fund to consider a decent allocation to. Just keep in mind that if I'm right about a credit event, this would get hit too - just hopefully not as much. The movement of the Dollar will be a key driver if that's the case.

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