Which is the Better Buy Now: iShares Select Dividend ETF or iShares International Select Dividend ETF?

Which is the Better Buy Now: iShares Select Dividend ETF or iShares International Select Dividend ETF?

The bear market got you down? We examine which ETF is a better buy: iShares Select Dividend or the iShares International Select Dividend?

The iShares International Select Dividend ETF (BATS: IDV) seeks to track the investment results of an index composed of relatively high dividend-paying equities in non-U.S. developed markets. The iShares Select Dividend ETF (NASDAQ: DVY) conducts the same task except using relatively high dividend-paying US equities exclusively. The average price-to-earnings (P/E) ratio in the IDV is about half the average of the DVY. This is because U.S. equities are traditionally more expensive than their international rivals. 

With economic uncertainty in the U.S., it is crucial to remember that geographic diversification can be a practical tool to reduce your portfolio risk. This is why we examine which ETF is the better buy: The iShares Select Dividend or the iShares International Select Dividend?

iShares International Select Dividend ETF bull vs bear arguments

The interest earned by this ETF after deducting expenses over the past 30 days was 5.84%. This high yield is perfect for investors looking to generate cash flow compared to capital gains. The high yield is likely a result of lower valuations given to international stocks and the wide range of stocks available to select from these various markets. The expense ratio is more expensive than the iShares Select Dividend ETF at 0.49% compared to 0.38% however, thereby lowering any potential returns.

The fund’s double-digit holdings are financials (28.44%), materials (15.59%), utilities (15.59%), and industrials (15.54%). The relatively high weighting given to financials may benefit the ETF as interest rates continue rising, boosting bank’s profits. The fund is predominantly invested in Europe, but also has holdings across the globe. 

With Eurozone interest rates lower, and renewed support for the periphery economies, the region’s outlook is less gloomy than that of the U.S. However, the ETF has a large weighting in the UK, which is forecast to have full-year inflation at 10% and, like the US, enter a recession as rates continue to rise aggressively. Over the past ten years, the ETF has generated an average annual growth rate of 5.27% which is quite a low return, however, this may change as investors shift more to dividend-paying stocks for stability during the current market volatility.

iShares Select Dividend ETF bull vs bear arguments

The interest for this ETF after deducting expenses over the past 30 days was 3.27% — lower than the iShares International Select Dividend ETF. While the yield is lower, it is still a strong rate for investors looking to generate a steady cash flow. This rate is greater than its 12-month average, which can be explained by the bear market hammering the market caps of many stocks. 

The fund’s double-digit holdings are utilities (26.30%), financials (19.88%), and consumer staples (10.28%). This ETF is less concentrated in its top three holdings than its international peer, which implies a lower level of sectoral risk. However, the geographic risk is higher as all the equities are in the same country. Should the U.S. fall into a recession, as expected next year, there will be little protection provided to investors in the ETF. 

Over the past ten years, the fund has generated an average annual growth rate of 12.41%, significantly outperforming its peer. Even when using shorter time intervals, the Select Dividend ETF continues to outperform the International Select Dividend ETF. While historical metrics are not a guarantee for future growth, they help provide a sounder investment picture. In this case, the Select Dividend ETF carries more geographical risk, but the returns generated have been sufficient enough to warrant the added risk in the past. 

So which is the better buy right now?

Historically, the iShares Select Dividend ETF has been the more profitable investment. However, with the current market and economic turmoil, it may prove a sound strategy for investors with holdings predominantly in the U.S. to diversify to international holdings.

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