This ETF Offers Compensation for Emerging Markets Risk

September 27th at 9:00am by Tom Lydon

In what has been, until recently, a rough year for emerging markets equities and ETFs, investors have been reminded that getting compensated for taking on the elevated risk associated with developing economies is a good idea. ETF issuers have obliged with recent introductions that marry the emerging markets and income themes.

One of those new ETFs is the EGShares EM Dividend High Income ETF (NYSEArca: EMHD). EMHD tracks the FTSE Equal Weighted Emerging All Cap ex Taiwan Diversified Dividend Yield 50 Index, which is designed to deliver a broad basket of securities across emerging market countries that have been screened for high dividend yields. EMHD’s use of that index helped put index provider FTSE over the century mark regarding North American ETFs benchmarked to its indices. [FTSE Hits Century Mark For North American ETFs]

More important than number is 8.8%. As in the dividend yield sported by EMHD’s index, one that is noticeably higher than the yields on more widely used emerging markets benchmarks.

The index is equal-weighted and also screens for companies that have consistently delivered robust dividends to investors. EMHD has a 20.7% weight to Brazil, its largest country allocation, and a 20.3% weight to utilities, the second-largest sector weight. That might seem like a contradictory combination because Brazilian utilities dividends have declined this year.

However, South Africa is EMHD’s second-largest country weight and several South African firms have raised their dividends just since the start of September. South Africa may not be the first dividend destination investors think of, but there are currently almost 30 stocks on the Johannesburg Stock Exchange with yields of 3.5% or higher.

While Brazil and South Africa are not trading at discounts to the MSCI Emerging Markets Index, EMHD is adequately allocated to discounted markets. China and Turkey, two of the five emeging markets with the widest discounts to their historical averages, combine for over 28% of EMHD’s weight. Regarding China, the world’s second-largest economy is now the largest developing world dividend payer in dollar terms.

Other markets represented in the new fund include Pakistan, Thailand, India, Egypt, Colombia and Chile. EMHD charges 0.85% per year and EMHD has risen 3.7% since its August 15 debut.

ETF Trends editorial team contributed to this post.

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.

Tickers