Well-documented have been the struggles of emerging markets exchange traded funds this year, but the reality is, these ETFs have provided little to write home about for long-term investors in recent years.
Over the past three years, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) are each off a bit more than 8%. The silver lining is that investors are being compensated for being involved with these ETFs and others in the form of rising dividends.
Global dividend reached $1.03 trillion last year with $1 of every $7 of that total coming courtesy of developing world companies, according to Henderson Global Investors. Emerging markets payouts have jumped almost 110% over the past five years, Reuters reported.
Ongoing growth in emerging markets dividends could and should highlight the advantages of ETFs such as the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM), one of the gold standards among emerging markets dividend ETFs. Reinvested dividends have made a major difference for long investors in DEM and rival funds.
Over the past three years, DEM is down 17.4%, but just 7% when accounting for reinvested dividends. Russia and China combine for 36% of DEM’s weight, presenting something of a dividend growth advantage for investors. China is the largest dividend payer in dollar terms in the WisdomTree Emerging Markets Equity Income Index while Russia is the fastest growing dividend payer in the index. [Russia Looks to Assert Dividend Footprint]
DEM’s dividend is growing. The ETF paid about $1.84 a share in 2010, but close to $2.05 per share last year, according to issuer data.
The iShares Emerging Markets Dividend ETF (NYSEArca: DVYE) and the SPDR S&P Emerging Markets Dividend ETF (NYSEArca: EDIV) are among DEM’s rivals. The $184.5 million DVYE has a trailing 12-month yield of almost 5% and allocates a combined 41.3% of its weight to Taiwan and Brazil, two emerging markets with favorable dividend policies.
The $443 million EDIV has a trailing 12-month yield of 5.47% and is a bit more diverse at the country level as Taiwan, China and Brazil combine for about 45% of fund’s geographic weight. Importantly, neither EDIV nor DVYE offer much in the way of exposure to South Korea, a dud among emerging markets dividend destinations. [South Korea is no Dividend Destination]
EDIV’s dividend was close to $2 per share last year, according to State Street data.
In addition to the aforementioned funds, there is a new breed of emerging markets dividend ETFs that emphasize payout growth. That group includes the EGShares Emerging Markets Dividend Growth ETF (NYSEArca: EMDG).
EMDG tracks a FTSE index, which is relevant because that index provider does not classify South Korea as an emerging market and EMDG’s underlying index also excludes Taiwan. The result is an ETF where China, South Africa and Brazil combine for over 55% of the country weight.
Although EMDG is less than a year old, the ETF has its high points. For example, an index dividend yield of 3.87% is attractive as is a trailing P/E below 10. None of the ETF’s holdings receives a weight of more than 3%.
The WisdomTree Emerging Markets Dividend Growth Fund (NasdaqGM: DGRE) debuted a month after EMDG. Like DEM, DGRE is overweight Russia (12.5% in the new ETF) relative to the MSCI Emerging Markets Index. Other double-digit country allocations in DGRE include Brazil, South Africa, Indonesia and Thailand. [New Dividend ETFs With Staying Power]
DGRE is similar to the domestically-focused WisdomTree U.S. Dividend Growth Fund (NasdaqGM: DGRW) in that both screen for dividend growth candidates using a combination of growth and value factors. DGRE’s underlying index, the WisdomTree Emerging Markets Dividend Growth Index, was established in late June 2013. The ETF is up 6.3% in the past month.
The newest entrant to emerging markets dividend ETF fray is the Market Vectors MSCI Emerging Markets Quality Dividend ETF (NYSEArca: QDEM), which debuted in late January. QDEM tracks the MSCI Emerging Markets High Dividend Yield Index, which is home to companies “that have demonstrated dividend yields that are higher than average and deemed by the Index Provider, MSCI, to be both sustainable and persistent,” according to Market Vectors.
China, South Africa and Russia combine for almost 58% of QDEM’s weight. Not only are China and Russia two of the least expensive emerging markets on valuation, but the two countries are also two of the biggest dividend payers in the developing world. [Market Vectors Makes Quality ETF Push]
QDEM charges 0.5% per year and has thus far attracted $4.9 million in assets.
iShares Emerging Markets Dividend ETF
Tom Lydon’s clients own shares of EEM and DEM.