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A Passport To International Value

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Over the past year, ex-US developed markets equities are lagging their U.S. counterparts. As highlighted by a 12-month decline of 10.64% for the MSCI EAFE Value Index (as of Nov. 9, 2018), value stocks have not been immune to that trend.

Whether it is on a domestic or international basis, value has spent considerable time in recent years being unloved relative to growth and momentum. The out of favor status of developed markets stocks and the value factor could be poised to change.

“Given the increasing bearish mood of global markets and the historically low current valuations of the value strategy after long periods of underperformance, conditions appear to be ripe for the long-awaited value resurgence,” said Andrew Lapthorne, the head of equity quantitative research at Societe Generale.1

The laggard status of developed markets outside the U.S. is also notable. At the end of the third quarter, the MSCI USA Index was positive on year-to-date basis, but a dozen other MSCI benchmarks focusing on major developed economies, including Australia, Japan, Switzerland and the U.K., were in the red.

Areas Of Opportunity

Not all markets are currently offering value propositions. Fortunately for investor considering value wagers, some of the larger, least volatile developed markets outside the U.S. are showing some signs of value rebounds. Those include the U.K. and Japan, among others.

In the U.K., “savaged value stocks are finally beginning to draw some attention from fund managers on account of their cheapness,” reports Investment Week.2 “The shares have reached such low levels as investors have been selling them off to fund purchases of technology companies but that process may be starting to reverse.”

As of the end of the third quarter, the MSCI U.K. Index, based on current and forward price-to-earnings ratios (P/E ratios) and price-to-book-value, was significantly discounted relative to the MSCI World and MSCI All-Country World benchmarks. The U.K. index also featured a noticeably higher dividend yield than those indexes and the S&P 500.

Source: MSCI, as of Sept. 28, 2018

Japan, the world’s third-largest economy behind the U.S. and China, is another major developed market showing value characteristics. At the end of the third quarter, the P/E ratio on the MSCI Japan Index was just 14.12x.3 That benchmark yields just over 2%, but in recent years, Japan’s traditionally cash-rich but tight-fisted companies have been parting with more of their cash to reward investors via buybacks and dividends.

Related: More Signs of Value’s Vindication

Importantly, Japanese companies are not taking on new debt to fuel shareholder rewards. Rather, the country, is home to some of the world’s sturdiest corporate balance sheets. Japan’s payout ratio, the proportion of earnings paid out as dividends, is the developed world’s lowest at just 30% and 50% of Japanese companies have more cash than debt on their balance sheets.4

Adding to Japan’s value proposition is this nugget: Last year, Japan’s aggregate return on equity (ROE), or net income dividend by shareholders’ equity, topped 10% for the first time on record.

Accessing International Value

The ALPS International Sector Dividend Dogs ETF (IDOG) is a fund that displays value traits. The U.K. and Japan combine for nearly 31% of IDOG’s geographic exposure. For more information about the fund, click here.

1 Source: Business Insider Nov. 10, 2018 https://www.businessinsider.com/stock-market-crash-investing-strategy-about-to-comeback-how-to-profit-2018-11
2 Source: Investment Week October 2018 https://www.investmentweek.co.uk/investment-week/news/1401038/uk-cheapest-value-stocks-world
3 Source: MSCI https://www.msci.com/documents/10199/b3ee6464-f705-4d65-81a0-d8756607cf9f
4 Source: Financial Times Oct. 18, 2018 https://www.ft.com/content/535a21cc-d13f-11e8-9a3c-5d5eac8f1ab4
Important Disclosures & Definitions
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
Standardized performance for the ALPS International Sector Dividend Dogs ETF (IDOG) can be found here. Current holdings for IDOG can be found here.
ALPS International Sector Dividend Dogs ETF Shares are not individually redeemable. Investors buy and sell shares of the ALPS International Sector Dividend Dogs ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.
An investor cannot invest directly in an index.
The S-Network Sector Dividend Dogs Index is designed to serve as a fair, impartial and transparent measure of the performance of US large cap equities with above average dividend yields.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.
The Fund is subject to the additional risks associated with concentrating its investments in companies in the market sector. Diversification does not eliminate the risk of experiencing investment losses.
The Fund’s investments in non-U.S. issuers may involve unique risks compared to investing in securities of U.S. issuers, including, among others, greater market volatility than U.S. securities and less complete financial information than for U.S. issuers. In addition, adverse political, economic or social developments could undermine the value of the Fund’s investments or prevent the Fund from realizing the full value of its investments. Financial reporting standards for companies based in foreign markets differ from those in the United States. Finally, the value of the currency of the country in which the Fund has invested could decline relative to the value of the U.S. dollar, which may affect the value of the investment to U.S. investors.
MSCI USA Index — The MSCI USA Index is designed to measure the performance of the large and mid-cap segments of the US market. With 625 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.
The MSCI United Kingdom Index is designed to measure the performance of the large and mid-cap segments of the UK market. With 101 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.
The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries*. With 1,640 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI ACWI Investable Market Index (IMI) captures large, mid and small cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries*. With 8,870 constituents, the index is comprehensive, covering approximately 99% of the global equity investment opportunity set.
Current P/E (Price-to-Earnings) Ratio — A price/earnings ratio can act as a gauge of the investment strategy in the current market climate, and whether it has a value or growth orientation. Companies in those industries enjoying a surge of popularity tend to have high P/E ratios, reflecting a growth orientation. More staid industries tend to have low P/E ratios, reflecting a value orientation.
Forward P/E (Price-to-Earnings) Ratio — The most-recent stock price divided by the next year’s earnings per share estimate first.
Price to book Ratio — A high P/B ratio indicates that the price of the stock exceeds the actual worth of the company’s assets, while a low P/B ratio indicates that the stock is a bargain.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS International Sector Dividend Dogs ETF.
DOG000816 03/31/2019
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