VIGI - VIGI: Dollar Strength Weighs Momentum Remains Soft

2023-11-09 16:07:45 ET

Summary

• The dollar's rise has negatively impacted the Health Care and Consumer Staples sectors, as well as foreign stocks.
• Higher interest rates have also affected indebted companies, causing them to lag behind.
• The Vanguard International Dividend Appreciation Index Fund ETF Shares has underperformed, and its technical outlook is weak.
• I outline key price levels to watch heading into year-end.

The dollar’s ascent since mid-July has wreaked havoc on certain sectors more than others. Health Care and Consumer Staples are two underperforming areas in the last four months. During that span, the greenback has rallied more than 7%. A rising dollar also negatively impacts foreign stocks in many instances. Finally, higher interest rates, which have come alongside a firming DXY, have left indebted companies as laggards.

All of these factors have been headwinds for the Vanguard International Dividend Appreciation Index Fund ETF Shares (VIGI). I reiterate my hold rating despite a better valuation today versus Q1. The momentum picture has just not improved as I was hoping during 2023.

Dollar Up, Health Care, Staples Down

According to Vanguard , VIGI seeks to track the performance of the S&P Global EX-US Dividend Growers Index through a passively managed, full-replication strategy. Fully invested at all times, the primarily large-cap ETF invests in companies from both developed and emerging market countries that have a track record of growing dividends year over year.

VIGI is a large ETF with more than $5 billion in assets under management and its trailing 12-month dividend yield is 2.21%, better than 50 basis points above the payout rate on the S&P 500. With an average daily volume of about 250k shares and a median 30-day bid/ask spread of six basis points, liquidity is generally healthy. Still using limit orders, particularly around market-open, is prudent with VIGI. Its annual expense ratio is low at 0.15%, earning it a solid A- ETF Grade from Seeking Alpha. It has also been a somewhat low-risk fund – as has been a theme for many non-US equity ETFs this year. Unfortunately, share-price momentum has been lackluster lately, and I will underscore I think that will persist over the next several months.

Digging into the portfolio, the 5-star, gold-rated by Morningstar ETF features primarily large-cap exposure, but there is more than 10% of the allocation invested in mid-Caps. What might come as a surprise to some investors is that there’s significantly more growth exposure rather than value, despite it being an ex-US equity portfolio. The focus on dividend growers means more access to firms with rising operating cash flow. On valuation, VIGI now features a price-to-earnings ratio under 17 – rather low for a high-growth stock fund, though long-term EPS growth is not all that high.

VIGI: Portfolio & Factor Profiles

VIGI indeed has high exposure to the Health Care sector and Consumer Staples area. Information Technology is a significant underweight relative to the SPX, and overall TMT exposure is very light. Pin 2023 underperformance largely on these sector differences.

VIGI: High Health Care Exposure

Seasonally, VIGI tends to rally into year-end but then struggle during the first handful of weeks of a new year, according to data from Equity Clock . So, a very tactical long play may work, but overall, being timely with your entry is prudent here.

VIGI: Neutral Seasonality Next 4 Months

The Technical Take

My thought, as 2023 progressed, was that VIGI would eventually catch a decent bid. Unfortunately for the bulls, that has not played out. Notice in the chart below that VIGI hasn’t gone much of anywhere in the last three years. Nearer term, a bearish rounded top pattern is in the making, with key support in the $68 to $69 zone. So long as the fund holds that support, then a tactical long play can work.

A bearish breakdown under it, though, would result in a measured move price objective to near $60 – the October 2022 bear-market low. What is encouraging is that the RSI momentum gauge at the top of the graph shows a bullish divergence – whereby momentum did not print a new low while price did. Making things tough on the bulls is a high amount of volume by price in the $69 to $75 area while the long-term 200-day moving average also has been important over the years with VIGI – that trend indicator line is currently above the share price.

Overall, given its relative underperformance, the chart and technical situation is not particularly strong for VIGI today.

VIGI: Bearish Rounded Top, $68 Key Support, Bullish RSI Divergence

The Bottom Line

I reiterate my hold rating on VIGI. The valuation is fine and there is some diversification with owning VIGI in addition to the S&P 500, but the ETF’s technical look is not strong today.

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