Why We Like Schwab International Dividend Equity ETF’s Risk/Reward Profile

Key Morningstar Metrics for Schwab International Dividend Equity ETF

• Morningstar Medalist Rating: Silver
• Process Pillar: Above Average
• People Pillar: Above Average
• Parent Pillar: Above Average

Schwab International Dividend Equity ETF’s SCHY focus on the market’s more profitable and stable stocks, and its low fee, should lead to better risk-adjusted performance than the MSCI ACWI ex USA Value Index.

This exchange-traded fund tracks the Dow Jones International Dividend 100 Index. This bogy starts with stocks in the Dow Jones Global ex US Large-Cap and Dow Jones Global ex US Mid-Cap indexes, and refines those cohorts down to 100 stocks. It excludes REITs and searches for stocks with higher dividend yields, greater profitability and free cash flow, lower volatility, and a long history of regular cash dividend payments. It focuses on the top names that meet these criteria while incorporating some buffer rules to keep turnover reasonable. The fund also promotes diversification by limiting single stock weightings to 4%, sector weightings to 15%, and emerging markets to 15%.

The resulting portfolio favors stable companies that are likely to maintain their dividend payments. On average, its profitability has been consistently higher than the MSCI ACWI ex USA Value Index, and it has tended to incur less of the market’s risk. Despite looking for stocks with higher dividend yields, it does not provide a higher yield than the value side of the market. As of October 2023, its trailing 12-month dividend yield stood at roughly 3.9%, placing it on par with its Morningstar Category index. That said, yield does not play a big role in the portfolio’s overall ability to deliver strong risk-adjusted performance relative to the MSCI ACWI ex USA Value Index.

The portfolio’s preference for stable companies tends to influence its composition. As of October 2023, it favored consumer staples, communications, and utilities stocks. Less than 10% of its portfolio was in stocks from the energy, IT, and consumer discretionary sectors.

So far, the fund has delivered on expectations. It has been less volatile than the MSCI ACWI ex USA Value Index, and it has edged that benchmark since Schwab launched it in April 2021. Its low fee should be a big advantage over its more expensive Morningstar Category peers.

Schwab International Dividend Equity ETF: Performance Highlights

So far, the ETF has been defensive, as promised. Its volatility came in about 11% lower than the MSCI ACWI ex USA Value Index from its late-April 2021 launch through October 2023, while its total return was modestly better.

The fund’s bogy, the Dow Jones International Dividend 100 Index, has a much longer history, dating back to the mid-2000s. On average, the index was less sensitive to the market’s moves than the category index, while incurring shallower drawdowns. For example, the index outperformed the MSCI ACWI ex Value Index by 7.5 percentage points per year during the global financial crisis from January 2008 through February 2009. Likewise, it beat the category index by 10.8 percentage points when the coronavirus pandemic pulled markets lower over the first three months of 2020.

Those benefits come with a trade-off. The ETF will likely lag the market during strong rallies. Its target index trailed the MSCI ACWI ex USA Value Index by 1.4 percentage points over the last nine months of 2020 as global markets emerged from the pandemic drawdown.