Dividend and International ETFs for the U.S. Fiscal Cliff

ETF Trends

The equities market and stock ETFs are in for a potential rough patch as the political uncertainty over the U.S. fiscal cliff could throw the markets into turmoil. Nevertheless, investors can hold onto dividend-paying stocks and diversify into international holdings to help weather any storm.

As the end of the year nears, market observers are starting to get worried about the impending fiscal cliff. According to a research note, BlackRock believes we will see one of three likely scenarios unfold:

  • Obama wins, Republicans win the House, no deal manifests in a lame-duck session, markets plunge and end in a lot of capitulation over structural reforms.
  • Romney wins, Republicans take Congress, no deal in a lame-duck session and a quick drop, followed by a comprehensive plan in summer of 2013, which would include cuts to Medicaid.
  • Or, lawmakers could begin trimming billions off excess spending, which would help put a stop to the fiscal cliff talks, but Washington may not fully commit to severe spending cuts that would realistically balance the budgets.

Nevertheless, investors can still find opportunities in the equities market, despite heading into greater uncertainty.

For instance, there are a lot of high-quality names among corporate America with the ability to pay and increase dividends as corporate balance sheets are as healthy as ever and companies are sitting on a ton of cash.

“Corporate managements have a great deal of flexibility in terms of increasing dividends and have been doing so over the past couple of years – a trend we believe will continue,” BlackRock analysts added. “We would also point out that, regardless of what happens with the fiscal cliff and tax policy changes, investors remain hungry for income, and dividend-paying stocks represent an excellent potential income source.”

Some dividend ETFs that track quality names include iShares Dow Jones Select Dividend Index Fund (DVY) , iShares High Dividend Equity Fund (HDV) , SPDR S&P Dividend ETF (SDY), Vanguard Dividend Appreciation ETF (VIG), Vanguard High Dividend Yield Index Fund (VYM) and WisdomTree Dividend Top 100 Fund (DTN) .

Moreover, with the fiscal cliff overhang, global risk is starting to shift toward the U.S. Investors may do well to take a greater global perspective and diversify into international exposure.

“We think selected European equities look quite attractive,” BlackRock analysts said, “and we would also encourage investors to seek out opportunities in other areas of the world, including countries such as Australia and New Zealand as well as many emerging and frontier markets that have compelling valuations.”

ETF options to play BlackRock’s suggestions include Vanguard European ETF (VGK) , iShares MSCI Australia Index Fund ETF (EWA) , iShares MSCI New Zealand Investable Market Index Fund ETF (ENZL) , Vanguard Emerging Markets ETF (VWO) and Guggenheim Frontier Markets ETF (FRN) .

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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