What is FID? (Pros, Cons, and Strategies)

If you're considering bolstering your retirement savings with international exposure, the First Trust S&P International Dividend Aristocrats ETF, commonly known as FID, might be a valuable addition to your portfolio. In the global market scenario, FID stands out for its focus on companies outside the U.S. that consistently pay and increase their dividends. Let's delve into what FID is, its pros and cons, and the strategies for effectively investing in this ETF.

What is FID?

FID is an international dividend-focused ETF in the global stock market. FID stands for First Trust S&P International Dividend Aristocrats ETF.

FID tracks the S&P International Dividend Aristocrats Index, which selects companies that not only pay dividends but have a history of increasing dividends year over year. This strategic focus on dividend growth over time makes FID an attractive option for investors seeking steady income from their international investments.

Key Features of FID

• Companies that have increased their dividends every year for at least 10 consecutive years.
• Companies must be domiciled in developed markets outside the U.S.
• The portfolio includes diversification across multiple industries, reducing sector-specific risks.

The index selects the top companies based on a combination of dividend yield and dividend growth rate, ensuring a balance between high yields and the stability of continuous dividend hikes.

FID Composition

FID comprises well-known international companies recognized for their dividend payments, like British American Tobacco (BTI), Nestle (NSRGY), and Unilever (UL). These companies span various sectors and industries, fostering a diversified investment environment. This composition is designed to minimize exposure to any one sector or region, providing a balanced, risk-mitigated portfolio.

Pros of FID

Diversified International Exposure

By investing in FID, investors gain exposure to a broad range of companies across different countries and sectors. This geographic and industry diversification helps to spread risk, insulating your investments from localized economic downturns and sector-specific volatility.

Consistent Dividend Growth

FID's focus on companies that have a track record of increasing their dividends ensures a steady and growing dividend income stream over time. This consistency is appealing for those looking to build a reliable income source for retirement or other long-term financial goals.

Risk Mitigation Through Quality Exposure

The requirement for companies in the index to have a decade-long history of growing dividends means that only financially strong and operationally efficient companies make the cut. This high-quality bias helps lower the risk to your investments.

Cons of FID

Higher Expense Ratio

Compared to U.S.-based dividend ETFs, FID comes with a relatively higher expense ratio, often around 0.60%. This higher cost is partly due to the complexities and costs associated with international investments, and it can eat into your net returns.

Currency Risk

Investing in an international ETF exposes you to currency risk. Fluctuations in exchange rates between the U.S. dollar and foreign currencies can impact the ETF's returns. This risk adds a layer of complexity that investors in domestic ETFs do not face.

Lower Yield Compared to Domestic ETFs

While FID offers consistent dividend growth, its yield may still be lower compared to some high-yield domestic dividend ETFs. This makes it less attractive for investors seeking immediate high-income yields.

FID Investment Strategies

Long-term International Diversification Strategy

FID is a fitting choice for investors aiming to diversify their portfolio internationally for the long term. The steady dividend growth and the high-quality nature of the constituent companies make it a prudent choice for a buy-and-hold strategy spanning at least 10 years. This strategy is particularly advantageous for retirement planning, providing both income and potential capital appreciation.

Currency Hedging

Given the currency risk inherent in international investments, investors might consider a currency hedging strategy to protect against unfavorable currency movements. This could involve using currency-hedged ETFs or other financial instruments to mitigate the impact of exchange rate fluctuations on returns.

Dividend Reinvestment

To maximize the benefits of FID, consider a dividend reinvestment plan (DRIP). By reinvesting the dividends, you capitalize on the compound growth effect, accelerating the growth of your investment portfolio over time. This strategy can significantly enhance the overall returns, especially in a long-term investment horizon.

In conclusion, FID provides a robust option for investors looking to diversify their portfolios with strong, dividend-growing international companies. While it comes with certain risks like a higher expense ratio and currency fluctuations, its advantages in steady income growth, diversified exposure, and risk mitigation make it a valuable consideration for long-term investment strategies.