The Case for Emerging Market Dividend ETFs
June 5th 2012 at 9:34am by Tom Lydon
Emerging market economies have displayed strong fundamentals which support investing in this asset class via exchange traded funds. Headline risk from the Eurozone debt crisis is likely to be the largest threat to emerging market investments throughout the second quarter.
“Slowing growth in the developed markets will weigh on emerging markets, many of which are export-oriented. However, the long-term emerging-markets growth story remains intact. GDP growth rates in emerging markets are expected to outpace those of developed markets, thanks to new infrastructure construction, higher-value manufacturing and services exports, and rising domestic consumption,” Patricia Oey wrote in a recent ETF analysis on Morningstar.
While the current market environment is “risk-off,” investors are decreasing their emerging market exposure. However, emerging economies have more room to adjust their monetary and fiscal policies to support future growth and inflationary risks have subsided. [Emerging Market Dividend ETFs]
High dividend emerging market ETFs offer investors some exposure to these economies while taking away near-term exposure to more volatile market areas, reports Russ Koesterich for iShares blog. The iShares Emerging Markets Dividend Index Fund (NYSEArca: DVYE) offers a good mix of income and risk management at a nice valuation. [Three Dividend ETFs to Consider]
WisdomTree Emerging Markets Equity Income (NYSEArca: DEM) is another ETF option in this category.
Investors should consider a fund such as this because it features a lower beta. In other words, high dividend payers in emerging markets generally move around 0.8% for every 1% change in the overall emerging market universe, reports Koesterich. Beta is a measure of the tendency of securities to move with the broad market.
Secondly, the high yield that comes with this index is around 6%, compared to 2.5% for the S&P 500, and about 1.8% or less for a 10-year Treasury note. The low beta is also a result of the stability of the high-dividend companies that are included in the index. They are established, stable companies. [Special Report: Surveying the Dividend ETF Landscape]
Furthermore, high dividend payers in emerging markets usually trade at a significant discount to most global equity benchmarks. Some of the stocks in DVYE are trading at a 20% discount compared to broad emerging market equity indices.
Investors will be eying the ECB policy meeting this Thursday for any indication that Europe or the U.S. are planning further stimulus proposals. The fate of the Eurozone is ultimately overshadowing any rapid growth in emerging economies regardless of the healthy fundamentals these countries possess. [ETF Spotlight: Emerging Market Dividends]
WisdomTree Emerging Markets Equity Income
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.