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2024 was another year of disappointment for international equities. With just one trading day left in the year, the widely observed MSCI ACWI ex USA IMI Index is up just 5.2% on annual basis compared to a gain of 25.3% for the S&P 500.
Over the past three years, that index, which is comprised of developed and emerging market equities, is up less than 2%. That glum showing goes a long way toward explaining why many advisors and investors have largely ignored ex-US stocks despite the diversification benefits offered by the asset class.
Further muddying the case for international stocks is that their laggard status is now so long-running that asset is arguably under-owned and market participants are searching for catalysts beyond a long spell of under-performance. Conversely, some investors are begging for reasons to invest outside the U.S.
Multiples on ex-US equities have been low for some time and betting that these stocks are overdue to outperform isn’t a legitimate asset allocation strategy. Putting it all together, perhaps the best way for advisors to tap international stocks in 2025 is in broad fashion, eschewing stock-picking and single-country bets, and to do so in cost-effective fashion. One way of capitalizing on what could be a year of improvement for international stocks is with the Schwab International Dividend Equity ETF (SCHY).
Sizing Up SCHY
Broadly speaking, international dividend benchmarks have been slightly better performers over the past several years than non-payout equivalents. The dividend gauges have also been less volatile, amounting to two modest endorsements of SCHY’s potential in 2025.
Specific to the Schwab ETF, it offers a lower volatility, higher quality mousetrap by focusing on companies with the ability to grow payouts rather than those with high dividend yields.
“The resulting portfolio favors dividend payers that are likely to maintain their dividend payments. On average, its profitability has been consistently higher than the MSCI ACWI ex USA Value Index’s, and it has tended to incur less of the market’s risk,” notes Morningstar analyst Daniel Sotiroff. “Its trailing 12-month yield of 6% was about 1.7% higher than the value index’s at the end of November 2024. That said, yield does not play a big role in the portfolio’s overall ability to deliver strong risk-adjusted returns relative to the index.”
SCHY’s favorable volatility traits are sourced via heavy exposure to defensive consumer staples and healthcare stocks and by allocating 51.3% of its weight to European equities. The ETF’s 11.7% weight to the healthcare sector could be a catalyst in 2025 because analysts and market observers widely expect that sector to post better returns than it did this year.
SCHY a Defensive Play
What clients are getting with SCHY is a low-cost, equity income play with lower volatility than non-dividend international equity ETFs.
On the cost front, as is the case with many Schwab ETFs, SCHYY is cheap. Its annual fee of 0.14%, or $14 on a $10,000 investment, is among the more favorable in the category. In other words, defense is inexpensive with this ETF.
“So far, it has performed like a defensive fund. Its volatility came in about 12% lower than the MSCI ACWI ex USA Value Index’s from its late-April 2021 launch through November 2024, while its total return trailed the benchmark by about 1.4 percentage points annualized. Most of that deficit occurred over the past two years as the Morningstar Category index increased at a steady clip,” concludes Sotiroff.
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