FIDI: Relatively Appealing Yield Comes With Underperformance, Worrying Downside Risk

seekingalpha05-28

joshlaverty Amid the bull market, total return investors see their theses materializing as portfolios gradually become bulkier. However, such periods of market ebullience do have a few side effects, ...

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However, such periods of market ebullience do have a few side effects, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4695939-fidi-relatively-appealing-yield-comes-with-underperformance-worrisome-downside-capture\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>FIDI: Relatively Appealing Yield Comes With Underperformance, Worrying Downside Risk</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nFIDI: Relatively Appealing Yield Comes With Underperformance, Worrying Downside Risk\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-28 16:49 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4695939-fidi-relatively-appealing-yield-comes-with-underperformance-worrisome-downside-capture><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>joshlaverty Amid the bull market, total return investors see their theses materializing as portfolios gradually become bulkier. However, such periods of market ebullience do have a few side effects, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4695939-fidi-relatively-appealing-yield-comes-with-underperformance-worrisome-downside-capture\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4534","symbol_name":"瑞士信贷持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4695939-fidi-relatively-appealing-yield-comes-with-underperformance-worrisome-downside-capture","article_id":"2438324885","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/185058645/image_185058645.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2438324885","pubTimestamp":1716886154,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"According to its website, FIDI ...seeks to provide investment returns that correspond, before fees and expenses, generally to the performance of the Fidelity International High Dividend IndexSM.  The index itself is supposed to  reflect the performance of large and mid-capitalization developed international high dividend-paying stocks that are expected to continued to pay and grow their dividends. In the methodology document, which can be found on the Fidelity website, it is explained that the selection universe consists of the 1,000 most expensive developed-world stocks . The composite factor score is used to determine whether a company should be selected for inclusion or not. The score is tripartite, with an emphasis put on the dividend yield (70%), while the payout ratio (15%) and dividend growth (15%) are also considered. So this is not a pure-play high-yield strategy but more of a mix of dividend yield, quality, and growth, which I appreciate, as this should help to filter out val","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4534":"瑞士信贷持仓","FIDI":"Fidelity International High Dividend ETF","BK4585":"ETF&股票定投概念","AAVMY":"Abn Amro BK N V","BK4132":"无线电信业务","IVV.AU":"ISHARES S&P 500 ETF/AUS","SCHF":"Schwab International Equity ETF","BK4588":"碎股","BK4550":"红杉资本持仓","HDEF":"X-trackers MSCI EAFE High Dividend Yield Equity ETF","VOD":"沃达丰","BK4207":"综合性银行","FDN":"First Trust Dow Jones Internet I","BK4581":"高盛持仓","BK4504":"桥水持仓","ACWX":"iShares MSCI ACWI ex U.S. ETF","DTH":"WisdomTree DEFA Equity Income","IDOG":"ALPS International Sector Divide","BK4532":"文艺复兴科技持仓","IVV":"标普500指数ETF"},"translate_title":"FIDI：相对有吸引力的收益率伴随着表现不佳，令人担忧的下行风险","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"IVV.AU":1,"VOD":1,"US7Y.BOND":1,"US6M.BOND":1,"US5Y.BOND":1,"US3Y.BOND":1,"US30Y.BOND":1,"US2Y.BOND":1,"US12M.BOND":1,"US10Y.BOND":1,"SCHF":1,"AAVMY":1,"IVV":1,"IDOG":1,"FIDI":1,"ACWX":1,"DTH":1,"HDEF":1,"FDN":0.9,"US912797HE00.BOND":0.6,"US912797GW17.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GB79.BOND":0.6,"US912797FS14.BOND":0.6},"content_text":"joshlaverty Amid the bull market, total return investors see their theses materializing as portfolios gradually become bulkier. However, such periods of market ebullience do have a few side effects, with high-yield investors being among those affected. The issue here is that their opportunities in the equity universe are shrinking as multiples are stretching further. There are a few solutions they might consider.  First, it is possible to lower the bar for quality and growth characteristics, thus potentially venturing into a high-risk arena rife with hidden or obvious value traps. The adverse consequences of that decision might impact their portfolios in many ways. It might be a dividend cut at some point or an outright dividend suspension assisted by a material share price depreciation. Second, it makes sense to get a bit more creative and opt for an international equity portfolio, benefiting from the discount inherent to non-U.S. stocks. This is a promising solution, as global stocks might offer a similar level of quality with much more attractive yields.   In the past, I covered a few exchange-traded funds that offer exposure to that universe, and today, I would like to initiate coverage of another name in this cohort, the Fidelity International High Dividend ETF (NYSEARCA:FIDI). At first glance, this is a nicely diversified portfolio with a healthy dividend yield of over 4% and an expense ratio of just 18 bps, which is fairly small by international equity ETF standards. But upon more attentive inspection, numerous disadvantages come to light, making it a strategy worth avoiding. Let us review them, as well as pay due attention to a few existing positives below in the note. What is the basis for FIDI's strategy? According to its website, FIDI ...seeks to provide investment returns that correspond, before fees and expenses, generally to the performance of the Fidelity International High Dividend IndexSM.  The index itself is supposed to  reflect the performance of large and mid-capitalization developed international high dividend-paying stocks that are expected to continued to pay and grow their dividends. In the methodology document, which can be found on the Fidelity website, it is explained that the selection universe consists of the 1,000 most expensive developed-world stocks (adjusted for free float). The composite factor score is used to determine whether a company should be selected for inclusion or not. The score is tripartite, with an emphasis put on the dividend yield (70%), while the payout ratio (15%) and dividend growth (15%) are also considered. So this is not a pure-play high-yield strategy but more of a mix of dividend yield, quality, and growth, which I appreciate, as this should help to filter out value traps in order to alleviate certain risks and boost returns longer-term. The idea is to select 100 names, though the count might fluctuate marginally around that mark. Even though the index is rebalanced only once a year, composition changes tend to be nonetheless substantial owing to the pickiness of the methodology, so the high turnover of the FIDI portfolio, currently at 67%, is something to tolerate. FIDI's portfolio: chiefly inexpensive European and Canadian stocks As of May 23, FIDI's portfolio comprised 101 common stocks and one unit stock, namely the Euronext Amsterdam-listed ABN AMRO BANK N.V. (Amsterdam ticker ABN) (OTCPK:AAVMY). The key ten cohorts had a weight of about 26.3%, while the lower ten accounted for just 1.3%. Using the currency column available in the FIDI holdings dataset, I have found out that most of the net assets are deployed to stocks denominated in the euro, with the Canadian dollar and the Japanese yen being the second and third-largest exposures, respectively.   The table reflects only data for common and unit stocks (Created by the author using data from FIDI) An important remark here is that investors should understand that exposure to the loonie and the Australian dollar makes this portfolio rather sensitive to the global commodity cycle, thus adding a bit more volatility they might not want or might not tolerate. The CAD is influenced mostly by oil prices, while the AUD depends on iron ore prices, among other factors. To get a grasp of what countries are represented, I relied on the country codes in the ISIN column. Using that method, I identified the following exposures:   The table reflects only data for common and unit stocks (Created by the author using data from FIDI) Besides, FIDI also has the Kiwi dollar in its portfolio but no Wellington-listed New Zealand stocks. Next, to analyze the value and quality characteristics of the portfolio, I have taken the key 15 companies (36.5% of the net assets) as a sample. I have arrived at the following conclusions:  FIDI should have mostly solid value characteristics since, as of May 27, 10 out of its 15 main holdings had a Quant Valuation grade of B- or higher, with 8 in the A league. For example, Vodafone Group (VOD) (London ticker VOD), FIDI's third-largest stock with 2.83% weight, had an A+ grade, among other things, thanks to its Forward EV/EBITDA of just 6.55x. Also, 11 out of 15 had a Quant Dividend Yield grade of at least B. In terms of quality, I believe the portfolio is mostly robust, as 11 names had at least a B+ Profitability grade.  Besides, I have also compared FIDI's P/E ratio to that of a few of its peers, which I covered in the past. ACWX, which represents global equities, IVV, which represents the U.S. market, and developed world equities proxied with SCHF, were added for better context.   ETF P/E   FIDI 11.25   Xtrackers MSCI EAFE High Dividend Yield Equity ETF (HDEF) 12.84   ALPS International Sector Dividend Dogs ETF (IDOG) 9.94   WisdomTree International High Dividend Fund ETF (DTH) 9.42   iShares MSCI ACWI ex U.S. ETF (ACWX) 15.36   iShares Core S&P 500 ETF (IVV) 24.39   Schwab International Equity ETF (SCHF) 15.60   Click to enlarge Data from Portfolio Visualizer So while FIDI is not the cheapest in the group, it is trading at a reasonable discount to HDEF, ACWX, SCHF, and IVV. FIDI has delivered lackluster performance since inception Incepted in January 2018, FIDI underperformed the U.S. market represented by IVV, which is explainable assuming FX gyrations amid the trade war, the pandemic, the post-pandemic recovery, geopolitics, etc. However, a much bigger problem that I have identified here is that it also lagged developed world equities proxied with SCHF, as well as certain peers.    Metric FIDI HDEF DTH SCHF IDOG IVV   Start Balance $10,000 $10,000 $10,000 $10,000 $10,000 $10,000   End Balance $10,474 $12,377 $11,095 $12,524 $13,061 $19,810   CAGR 0.74% 3.47% 1.68% 3.67% 4.37% 11.56%   Standard Deviation 18.92% 17.01% 17.68% 17.41% 18.50% 17.79%   Best Year 16.32% 25.00% 18.42% 22.24% 23.57% 31.25%   Worst Year -18.88% -15.75% -16.71% -18.28% -16.37% -18.16%   Maximum Drawdown -34.15% -24.71% -30.33% -27.49% -27.12% -23.93%   Sharpe Ratio 0.03 0.16 0.07 0.17 0.21 0.59   Sortino Ratio 0.04 0.24 0.09 0.25 0.32 0.89   Click to enlarge Data from Portfolio Visualizer. The period is February 2018–April 2024 Another issue is its maximum drawdown, which was the steepest in the group. This is somewhat surprising assuming the strategy incorporates dividend quality and growth criteria, which, in theory, should have made it safer. Another issue is the downside capture ratio. For the calculations below, SCHF was used as a benchmark:   Metric FIDI HDEF DTH IDOG   Upside Capture 92.02% 92.99% 92.26% 98.02%   Downside Capture 104.04% 94.26% 100.60% 95.48%   Click to enlarge Data from Portfolio Visualizer It appears FIDI has the largest figure in the group, which means it was falling even deeper when developed-world equities were selling off. In my view, it makes the ETF a too risky option to consider. FIDI's dividend characteristics leave a lot to be desired FIDI has a B ETF Dividend grade, which is nice to see, though it obviously does not immediately make it a fund worth buying into. Let us contextualize this. First, the peers I selected are not far behind: Seeking Alpha Second, it has the weakest TTM dividend yield and the lowest 5-year dividend CAGR. Seeking Alpha Investor Takeaway  The Fidelity International High Dividend ETF is built around the concept of a high dividend yield, with quality and growth ingredients added to the mix. This is a solid proposition, yet the reality is far from rosy. Its relatively appealing 4.09% TTM yield comes with a lackluster performance. The ETF has not only trailed the U.S. market, which might be explained by FX exposures detracting from its returns, but also developed-world equities since its inception. Alas, it also lagged behind a few peers. The downside capture ratio was fairly high to boot. Besides, there is also something to dislike when it comes to growth in distributions. In sum, while I see no sufficient reason for a Buy rating, I would refrain from constructing a bearish view, as FIDI's FX exposures are a wild card, so it might tactically surprise to the upside. In this regard, it is worth keeping a neutral stance. 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