As emerging markets exchange traded funds have tumbled, supporters have consistently said developing world equities are inexpensive compared to developed market counterparts.
In most cases, that is true, but that does not mean all emerging markets ETFs are value propositions. For example, Russia ETFs include valuations that are deeply discounted relative to long-term standards and the broader emerging markets universe, but the major ETFs have been in extended, multi-years slumps. [Worst Global Markets by Single-Country ETFs]
China is another discounted emerging market, but the China ETFs with inexpensive stocks have significantly lagged funds with pricy Internet and consumer discretionary names. China and Russia are just two examples, but they highlight the notion that cheap should not be confused with good value. [Unheralded China ETF Flexes its Muscles]
In the search for value among emerging markets ETFs, investors may want to consider funds with solid exposure to sectors that have been among the developing world’s strongest.
“These sectors would include Consumer Staples, Consumer Discretionary, Telecommunication Services and Health Care. I believe one reason these sectors have exhibited strong performance is their exposure to the emerging market consumer,” said WisdomTree Research Director Jeremy Schwartz in a recent note.
In the three-year period ending Dec. 31, 2013, sectors that trumped the MSCI Emerging Markets Index included technology, consumer staples, health care, discretionary and telecom, according to WisdomTree data. Laggard sectors included three that often dominate emerging markets ETFs – financial services, energy and materials. [China With no Banks]
The WisdomTree Emerging Markets Dividend Growth Fund (NasdaqGM: DGRE), which debuted in August, does have an almost 28% combined weight to materials and financial services. However, the other four groups that comprise DGRE’s top-six sector weights – staples, telecom, technology and discretionary – combine for 52% of the ETF’s weight.
Consumer sector exposure has the potential to continue being an alluring trait for investors evaluating emerging markets ETFs.
“I also believe the growing emerging market consumer class has the potential to drive much of the economic growth in the region. Given the emerging markets’ youthful demographics and the potential for their low per capita incomes to catch up with those of the developed world, this segment is likely to be a major driver of the region and of global growth,” said Schwartz.
Plus, DGRE offers the dividend kicker, relevant as emerging markets dividends have doubled over the past five year, helping developing world firms contribute $1 to every $7 paid in global dividends last year. [At Least EM Dividends are Rising]
South Africa, Brazil and Russia, countries with struggling ETFs but favorable dividend policies, combine for 40% of DGRE’s weight.
DGRE Index Statistics
Data Courtesy: WisdomTree