An Intelligent Idea for International Diversification

While the S&P 500 set an impressive pace in the first quarter, gaining 10.4%, some ex-U.S. developed markets benchmarks showed signs of life. For example, the widely followed MSCI EAFE Index gained 6% in the first three months of 2024. It remains to be seen. However, that could be the start of something more substantial for an asset class that’s long trailed domestic stocks. Should that prove to be the case, exchange traded funds such as the WisdomTree International Quality Dividend Growth Fund (IQDG) could be on the receiving end of renewed attention from advisors and investors.

The $977.4 million IQDG follows the WisdomTree International Quality Dividend Growth Index. It provides exposure to a broad basket of developed market dividend payers, excluding U.S. and Canadian companies. IQDG notched a solid showing in the first quarter. Additionally, it could be poised for more upside as 2024 moves forward. And, perhaps more importantly, if the U.S. and other developed markets equities decouple from each other.

Correlation Conundrum Could Finally Break

For years now, market participants eschewed ex-U.S. developed markets fare. One of the primary reasons is because the asset class was highly correlated to domestic stocks while trailing in terms of total returns.

“From a diversification perspective, most international-stock benchmarks, especially those in developed markets, have been closely tied to the U.S. market over the past three years, as shown below. Developed-markets equities, especially European stocks, have had the tightest correlation with U.S. equities,” noted Morningstar’s Christine Benz.