2023-08-16 13:25:04 ET
Summary
- The US Dollar Index has been strong, causing foreign stocks to underperform.
- Economic data in Europe has been better than expected.
- The WisdomTree International Hedged Quality Dividend Growth Fund ETF has benefited from the dollar's rise relative to its peers.
- I outline key price levels to watch as we venture into a bearish stretch on the calendar.
The US Dollar Index has had a very strong last month. After breaching the psychologically important 100 level in mid-July, the DXY has rallied steadily through 103 amid global market rockiness, namely economic weakness out of China. Europe, meanwhile, has actually seen economic data that has been better than expected. When the dollar rallies, foreign stocks typically underperform. Moreover, as volatility creeps up, shares of companies of low earnings quality could be most at risk.
I have a hold rating on the WisdomTree International Hedged Quality Dividend Growth Fund ETF ( IHDG ) - bullish trends in the dollar lately have helped it outperform its unhedged peers. Still, there are a few issues that concern me today.
The Dollar's Rise Is A Relative Win For IHDG
Economic Surprises Out of the UK, Euro Area Lately
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.
IHDG is a decent-sized ETF with $1.7 billion of assets under management as of August 15, 2023, while its dividend yield is nearly twice that of the S&P 500's at 2.57% on a trailing basis, according to Seeking Alpha. While you can buy a broadly diversified foreign stock fund for nearly zero expenses these days, IHDG is not all that cheap with its 0.58% annual expense ratio . But with a track record of more than nine years, its strategy has been well executed throughout several market cycles. Liquidity is solid with IHDG, evidenced by its low 0.03% median bid/ask spread and average daily volume of more than 250,000 shares.
Digging into the portfolio, it is very much a large-cap-focused ETF with just 15% of the allocation in the mid-cap space. There is no small-cap exposure, according to the Morningstar Style Box. WisdomTree lists the current price-to-earnings ratio at 18.5 as of August 15, 2023, and its forward P/E is slightly higher at 18.9. The portfolio features a net buyback yield of 0.9%, leading to a total shareholder yield of more than 3%. Since IHDG focuses on owning companies that are growing earnings with high quality, the fund is not beholden to any one market environment, though its low-volatility nature (partly driven by its currency hedge strategies) should help protect portfolios during corrections and bear markets.
IHDG: Portfolio & Factor Profiles
Key for investors to understand is that IHDG is a somewhat concentrated ETF. Forty percent of the allocation is in its top 10 stocks, with LVMH Moet Hennessy Louis Vuitton SE ( LVMHF ) being the top holding at 6% at the latest check. Where you will find some of the fastest-growing earnings companies is in the Consumer Discretionary sector - more than one-fifth of the fund is invested in that space. In contrast to the S&P 500, there's just 12% in the Information Technology sector. It is also key to monitor economic happenings in Switzerland, the UK, and France as those are the top country weights.
IHDG: Top Holdings, Sectors, and Country Weights
Seasonally, August and September tend to be weak months for IHDG, according to data from StockCharts . The October through May period has historically been where much of the fund's total returns on a calendar basis have come.
IHDG: Bearish Seasonal Trends Through September
The Technical Take
IHDG is working on a bearish to bullish reversal pattern that bears watching. Notice in the chart below that the ETF has been trending higher since Q4 last year. An uptrend support line has held on a few occasions in 2023 while resistance is seen clearly at the $40 to $41 range. I also see that there was a modest bearish RSI momentum divergence back in June when the fund notched a minor new year-to-date high.
I would like to see the fund rally above $41 to help confirm the reversal pattern, in which case a bullish measured move price objective to $47 would be in play based on the $35 low notched in 2022. You can also make the case that a bullish inverse head and shoulders pattern could be in the works. With a freshly rising 200-day moving average, and the price holding that line in early July, the bulls appear to be in control, but we need to see that aforementioned breakout, too. Notice that there is a high amount of volume by price right under the noted resistance - another piece of evidence that IHDG is at a critical juncture.
Overall, the pattern is favorable, but I want to see the breakout to confirm a buy signal.
IHDG: Monitoring the $40 to $41 Range
The Bottom Line
IHDG has mixed characteristics in my view. The valuation is not bad considering its low volatility and focus on earnings growers. Also, the fund is on the expensive side while the technical setup is near a bullish breakout. Thus, I have a hold on the fund for now.
For further details see:
IHDG: The Dollar's Rise Is A Relative Benefit, Monitoring Broader Trends