The International (Foreign) Large Cap Value asset class is a difficult asset class to research. The reason being is that there haven’t been funds available for very long in this asset class. The older mutual funds available in this asset class have only been around since the mid 1990’s. The oldest ETF available in this category is the BLDRS Developed Markets 100 ADR Index Fund (ADRD), inception December 2002. So, without significant fund data to compare this asset class with others, I am relying heavily on the expertise of historians, academic studies and reliable financial experts.
So, what do the experts have to save about the International Large Cap Value asset class:
- Paul Merriman, Author, Teacher, retired Financial Advisor and former owner of Merriman Wealth Management
- “From 1975 through 2014, international large-cap value stocks compounded at 14.4%, compared with 12.2% for the S&P 500.
- (Because these measurement periods began in 1975, right after a major market decline, they include a few robust recovery years. Thus, these returns are approximately two percentage points higher than the long-term results that should be expected.)
- At those rates, a $100 initial investment would have grown to $21,762 in international large-cap value; in the S&P 500, $100 would have grown to only $9,962.
- The combination of these two asset classes, rebalanced annually, had a compound return of 13.6%, and $100 would have grown to $16,494, increasing the return by 66% compared with just the S&P 500. While I don’t advocate this specific combination of asset classes by itself, it’s a fine example of the benefits of a little bit of well-chosen diversification.
- When I looked at 15-year periods, I found similar results.
- Over the 26 15-year periods into which we can divide this data, international large-cap value stocks compounded, on average, at 14.6%, making an initial $100 investment grow to $772. By contrast, the S&P 500 compounded at only 12.1%, enough for $100 to grow to $552.
- A portfolio split equally between these two, rebalanced every year, on average compounded at 13.7% and grew an initial $100 to $682.
- It’s interesting to me that the combination captured more than 94% of the gains of international large-cap value alone — and did so while reducing the level of risk (standard deviation) by 26%.
- Also worthy of note: In the worst period for both asset classes (2000 through 2014), the S&P 500 compounded at 4.2% while international large-cap value stocks compounded at 7.2%. The combination, during this period, compounded at 5.9%.
- I see this as another example of the beneficial effects of combining the S&P 500 with a higher-performing asset class. During the worst of times, this combination produced higher returns and lower volatility than the S&P 500 alone.”
- Reference article: Foreign big-cap value stocks outshine U.S. counterparts
- Eric Nelson, CFA at Servo Wealth Management
- “As I mentioned before, we can measure international developed large cap stocks since 1970 (+9.3% a year – only 0.2% per year less than the return on US stocks from 1928-2016), but to pull in all four corners of the international market, we need to measure returns since 1982:
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- This is an interesting outcome. We’re looking at about 35% of the world market (the US makes up about 55%), over a period of time that is fairly long but completely different from the US example. And, yet, asset class returns are almost identical. Int’l large cap stocks returned +9.0% per year, int’l large value stocks did +11.4%, int’l small cap stocks did +11.6% and international small value stocks did +13.6%. Think about this for a minute – international large and small value stocks over the last quarter century have generated returns within 0.1% a year of US stocks from 1928-2016. At some point, we have to stop thinking this is noise and realize we’re seeing the signal.”
- Reference article: What’s The Really Long-Term Return On Stocks?
- Index Fund Advisors, reference website: History Characterizes Risk and Return
- Annualized Returns of Various Indexes
Now we have a historical reference that tells us that the Foreign Large Cap Value asset class has the potential to outperform the U.S. Large Cap Blend asset class, aka the S&P 500. Although the potential for outperformance does exist, Foreign Large Cap Value has drastically underperformed the S&P 500 since 1995 (see chart below). With this information, I believe investors should do an extra amount of due diligence before investing in this asset class. As for me, I have committed a portion of our portfolio to the International Large Cap Value asset class because I believe the reward is worth the risk and I want this asset class in my portfolio as another diversifier.
U.S. Large Cap Blend vs International Large Cap Value January 1995 – February 2018
Source: Portfolio Visualizer
I used the TD Ameritrade ETF screener and the Morningstar Portfolio manager tool to find 12 ETFs in the Foreign Large Cap Value Morningstar category that are 10 years old or older. I have compared each fund head-to-head with back testing tools at Portfolio Visualizer and ranked all 12 funds in order of long-term performance. Here are the results:
Source: Morningstar
Although I ranked all these funds head-to-head, I have only posted the results for the top 4 funds. If you would like to see comparisons of the other funds, please check out the excellent tools available at Portfolio Visualizer.
FGD vs DWM vs PXF vs IDV: January 2008 – February 2018
Source: Portfolio Visualizer
Let’s take a deeper dive into the top 4 ETFs in the Foreign Large Cap Value category by looking at their fund descriptions, objectives and strategies:
- FGD – First Trust Dow Jones Global Select Dividend Index Fund is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the Dow Jones Global Select Dividend Index.
- The Index universe is defined as all component companies of the 25 developed-market country indexes in the Dow Jones Global Indexes (DJGI) family.
- To be considered for the Index, companies in the Index universe must pass eligibility screens for dividend quality and liquidity. The company must:
- Pay a current dividend.
- Have a current-year dividend-per-share ratio that is greater than or equal to its five-year average annual dividend-per-share ratio.
- Have a five-year average payout ratio of less than or equal to 60% for U.S. and European companies; or less than or equal to 80% for all other countries.
- Have a minimum three-month daily average trading volume of $3 million.
- Stocks meeting all eligibility requirements are ranked by dividend yield.
- The top 100 highest-yielding stocks are selected for inclusion in the Index, subject to buffers designed to limit turnover by favoring current Index components:
- Stocks in the Index universe are ranked in descending order by indicated annual dividend yield, defined as a stock’s unadjusted indicated annual dividend (not including any special dividends) divided by its unadjusted price.
- All current Index component stocks that are among the top 150 stocks are included in the Index.
- Non-component stocks are added to the Index based on their rankings until the component count reaches 100.
- Component weightings are assigned based on dividend yield. Weights of individual component stocks are capped at 10%.
- The Index is reconstituted and adjusted annually in March.
- IDV – iShares International Select Dividend ETF
- INVESTMENT OBJECTIVE: The iShares International Select Dividend ETF seeks to track the investment results of an index composed of relatively high dividend paying equities in non-U.S. developed markets.
- Exposure to established, high-quality international companies
- Access to developed market stocks that have provided consistently high dividend yields over time
- Use to expand income strategies to international markets
- DWM – The WisdomTree International Equity Index is a fundamentally weighted Index that measures the performance of dividend-paying companies in the industrialized world, excluding Canada and the United States. Prior to August 31, 2015, the WisdomTree International Equity Index was named the WisdomTree DEFA Index.
- Gain exposure to developed international world, ex-U.S. and Canada all cap equity from dividend paying companies
- Use to complement or replace international developed all cap broad-based active and passive strategies
- Use to satisfy demand for growth potential and income focus
- PXF – The PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio (Fund) is based on the FTSE RAFI Developed ex U.S. 1000 Index (Index). The Fund will normally invest at least 90% of its total assets in securities that comprise the Index and American Depository Receipts (ADRs) based on the securities in the Index. The Index is designed to track the performance of the largest developed market equities (excluding the US), selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The equities with the highest fundamental strength are weighted according to their fundamental scores. The Index is computed using the net return, which withholds applicable taxes for non-resident investors. The Fund and the Index are reconstituted annually.
Thank you for reading this article; please share it with a friend.
Very Respectfully, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: We own shares of FGD and intend to purchase more shares in the future. I am not an investment advisor. Before investing in any fund mentioned in this article please do your own due diligence or seek professional advice from a Registered Investment Advisor.