What is EFAD? (Pros, Cons, and Strategies)
When considering the diverse landscape of Exchange-Traded Funds (ETFs), the ProShares MSCI EAFE Dividend Growers ETF (EFAD) stands out for those specifically interested in international dividend growth. This ETF offers investors exposure to strong, dividend-growing companies in developed markets outside North America. In this blog post, we'll delve into what EFAD is, explore its pros and cons, and discuss effective investment strategies.
What is EFAD?
EFAD is an ETF that focuses on dividend-growing companies in developed markets, excluding the U.S. and Canada. EFAD stands for ProShares MSCI EAFE Dividend Growers ETF.
EFAD tracks the MSCI EAFE Dividend Masters Index, which targets companies that have consistently increased their dividends over the past 10 years.
Most traditional dividend ETFs generally invest in companies offering high dividends. However, the index that EFAD follows specifically invests in companies that have a significant history of increasing their dividends. This approach, which emphasizes consistent dividend growth, makes EFAD an attractive choice for investors seeking international exposure with a stable income stream.
Key Features of EFAD
- Companies with at least 10 consecutive years of dividend growth
- Focuses on developed markets outside of the U.S. and Canada
- Diversification across multiple sectors and countries
The screening process prioritizes companies with a solid history of dividend increases, offering a balanced mix of countries and sectors to reduce regional and sector-specific risks.
EFAD Composition
The EFAD ETF includes notable international dividend growers such as Nestle, Roche, and Unilever. These companies are from various sectors, including consumer staples, healthcare, and industrials, offering a well-rounded exposure to global markets. The ETF is predominantly composed of large-cap companies that have a history of solid financial performance and stability.
Pros of EFAD
Geographic Diversification
EFAD provides investors with exposure to developed markets outside North America. This diversification helps mitigate risks associated with investing in a single region or country, enhancing the stability of your investment portfolio.
Consistent Dividend Growth
A primary advantage of EFAD is its focus on companies with a robust track record of increasing dividends. This approach not only provides a steady income but also indicates a company’s strong financial health and management's commitment to returning value to shareholders.
Potential for Capital Appreciation
In addition to dividend income, EFAD offers potential for capital appreciation. Companies that consistently grow their dividends often experience share price increases over time, contributing to overall returns.
Low Expense Ratio
EFAD has a competitive expense ratio of 0.60%, which is relatively low for an international ETF. The low expense ratio ensures that more of your investment returns are retained, enhancing your net gains over time.
Cons of EFAD
Currency Risk
Investing in international markets exposes you to currency risk. Fluctuations in foreign exchange rates can impact the value of your investment returns, either positively or negatively.
Lower Dividend Yield Compared to Some U.S. ETFs
While EFAD focuses on dividend growth, its current dividend yield of around 2-3% may be lower than some high-yield U.S. dividend ETFs. Investors looking for immediate high yields might find this aspect less appealing.
Exposure to Market and Political Risks
International investments carry market and political risks specific to each region. Changes in local regulations, economic policies, or political stability can significantly affect investment performance.
EFAD Investment Strategies
EFAD is a solid option for those seeking stable dividend growth from international markets, but it may not be suitable for everyone. Let's explore some effective investment strategies for EFAD.
Long-term Investment Strategy
Given EFAD's focus on consistent dividend growth, a long-term investment horizon is ideal. This allows investors to benefit from the compound effect of reinvested dividends and potential capital appreciation. A minimum investment period of 5-10 years is recommended to fully realize these benefits.
Dividend Reinvestment
To maximize the compound effect, consider reinvesting the dividends received. Regularly investing a fixed amount and reinvesting dividends can significantly enhance the overall growth of your portfolio over time. This strategy is particularly effective for retirement planning or long-term wealth accumulation.
Diversification with Other ETFs
While EFAD offers excellent international exposure, it should be a part of a diversified portfolio that includes other asset classes and geographic regions. Combining EFAD with U.S.-focused ETFs or sector-specific ETFs can help achieve a balanced and robust investment portfolio.
Monitoring and Rebalancing
Regularly monitor and rebalance your portfolio to maintain the desired asset allocation. Given the dynamic nature of global markets, periodic rebalancing ensures that your investment remains aligned with your overall financial goals and risk tolerance.
Conclusion
EFAD offers a unique opportunity to diversify your portfolio with international dividend growers. By focusing on companies with a proven track record of increasing dividends, EFAD provides a stable and growing income stream, potential capital appreciation, and geographic diversification. While it comes with its set of risks, a well-thought-out long-term investment strategy can significantly benefit from including EFAD in your portfolio.
Invest wisely, and happy investing!