For income-seeking investors, global-dividend ETFs promise broad diversification, low volatility and above-average yields. They also come with somewhat higher costs and a few tax drawbacks for Canadians, making them less suitable in some portfolios.
“Most people buying these want a higher level of income than they get from a broader index,” says Alan Fustey, a Winnipeg-based portfolio manager at Adaptive ETF, a division of Bellwether Investment Management Inc. “And they also want a high degree of sustainability on that income.”
In terms of total returns, however, some of these ETFs “lagged the market pretty badly last year,” Mr. Fustey notes, largely because they focus on dividend-heavy sectors such as utilities and financials and are underweight in the technology, communications and lower-quality small-cap companies that outperformed.
Times have changed, and global-dividend ETFs have recently “resonated with yield-seeking Canadian investors,” says Tiffany Zhang, an ETF analyst at National Bank of Canada Financial Markets.
The funds represent a relatively small part of the Canadian landscape, she says, with $3.4-billion in assets currently under management in global, emerging-market and developed-market dividend ETFs, representing a little over 1 per cent of total Canadian ETF assets.
Year-to-date, however, these ETFs have gathered $297-million in net flows, representing 4 per cent of total equity ETF flows in the same period, which is “outsized compared with their 1-per-cent footprint of the ETF market,” Ms. Zhang says.
These funds can have varied index construction, Mr. Fustey notes, pointing to two Canadian-listed global-dividend ETFs from iShares that are well-diversified, each with 300 equity holdings, but are “dramatically different” in terms of sector exposure and fees.
The iShares Core MSCI Global Quality Dividend Index ETF (XDG-T), with about $198-million in assets, tracks the MSCI World High Dividend Yield Index and favours health care and consumer staples. Its management-expense ratio (MER) is relatively low at 0.22 per cent. It returned 6 per cent so far this year and about 17 per cent over the past 52 weeks. (All data from Morningstar as of April 9.) Dividends are paid semi-annually and the ETF can be purchased unhedged or hedged to the Canadian dollar (with no difference in the MER), allowing investors to choose if they want to assume the risk of currency fluctuations distorting their returns.
The iShares Global Monthly Dividend Index ETF (CYH-T), with $148-million in assets, tracks the Dow Jones Global Select Dividend Composite Index and focuses on financials and utilities. Its MER is 0.66 per cent, and it has returned 16 per cent year-to-date and 38 per cent over the past 52 weeks. This ETF has a 10-plus-year performance history, Mr. Fustey notes, is hedged to the Canadian dollar and dividends are paid monthly, which can be a bonus for income-seekers.
Payouts are paramount with global-dividend ETFs, says John De Goey, a portfolio manager at Wellington-Altus Private Wealth Inc. in Toronto.
He says these funds are for the long-term investor comforted by the fact that “the price of the underlying stock may go up or down, but I always get my dividend.”
Their “less sexy” securities tend to fluctuate less when markets are choppy, although Mr. De Goey is concerned they’re “a false safe harbour” with this lower volatility.
“If the market drops 25 per cent and a dividend ETF only drops 20 per cent, that’s not much comfort.”
He says it’s critical for investors to decide what they want their portfolio to accomplish with global-equity ETFs, including foreign exposure, low costs and favourable tax treatment.
The dividend tax credit that Canadian investors benefit from when there are cash payouts from Canadian companies is lost with some foreign-dividend products. Mr. De Goey suggests buying them only in registered retirement savings plans (RRSPs) and locked-in retirement accounts (LIRAs) “where the tax impact is immaterial.” The U.S. doesn’t recognize the tax-free savings account as a tax shelter, he warns, so U.S.-listed ETFs that produce dividends should be avoided there.
Foreign dividends are subject to a withholding tax of 15 per cent, he adds, but you should be able to claim that back through a foreign tax credit if the ETF is listed in Canada.
Dan Hallett, vice-president of research and principal at HighView Financial Group in Toronto, says investors “should really unglue their minds from product structure” and avoid being “seduced by headline yield” in global-dividend ETFs.
The key is that companies in these ETFs must have strong fundamentals, Mr. Hallett says.
An example is the Horizons Active Global Dividend ETF (HAZ-T), which has $205-million in assets and looks for companies paying dividends that are more likely to grow than drop. This ETF, managed by Guardian Capital of Toronto, has an MER of 0.78 per cent, reflecting the cost of its active strategy. HAZ has returned 5 per cent so far this year and 17 per cent over the past 52 weeks.
“Guardian successfully avoided dividend cuts in 2020, a year that saw a spike in dividend cuts and eliminations,” Mr. Hallet points out. He says investors in this fund “should not expect to shoot the lights out.”
Instead, he views it as a longer-term core holding “that I expect to somewhat soften the ups and downs that come with investing in global stocks,” which it has done through the last two bear markets and in tougher years such as 2011.
Mr. Hallet cautions that global-dividend ETFs aren’t a “one-off product.” For instance, he suggests pairing HAZ with a fund that holds smaller-company stocks in developed and emerging markets for well-rounded global exposure.
The best managers and most robust strategies are still vulnerable to cycles, which is something global-dividend ETF investors especially learned over the past year, Mr. Hallett adds. “You can’t consistently, sustainably have meaningfully less downside risk and better returns in hot markets as well.”