As more factor-based exchange traded funds come to market, advisers and investors are paying more attention to which factors prove most efficacious across various market environments.
Over longer holding periods, the quality factor has proven durable. When combined, dividend and quality stocks are even more potent, a thesis the Market Vectors MSCI Emerging Markets Quality Dividend ETF (NYSEArca: QDEM) is starting to prove.
QDEM, which recently celebrated its one-year anniversary, tracks the MSCI Emerging Markets High Dividend Yield Index. From there, investors can glean how the quality factor is applied in this ETF. The quality factor “captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics,” according to MSCI. [New ETFs Bolster MSCI]
Bolstering the case for quality investing, those other metrics include high returns on equity, stable dividend growth, robust cash flow, lack of financial leverage, sturdy balance sheets and strong management, notes MSCI.
In 2013, companies based in developing markets accounted for $1 of every $7 in global dividends paid, double the amount those firms contributed in 2009 and with global dividends poised to rise again this year, emerging markets stocks could be even larger contributors to global dividend growth.
QDEM’s dividend emphasis creates a significant gap between and traditional emerging markets ETFs in yield terms. The Market Vectors offering has a 30-day SEC yield of 4.2%, or 150 basis points higher than the same yield on the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). [Emerging Markets Quality]
QDEM’s quality and dividend tilts are bearing fruit where it matters most: Performance. Over the past year, QDEM is up 9.5%, nearly triple the 3.2% average gain for EEM and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) during the same period.
QDEM has also managed to trade higher this year despite its 21.6% weight to the energy. Fortunately, the ETF’s combined weight to volatile Brazilian and Russian stocks is just 15%. That is overweight compared to the MSCI Emerging Markets Index, which serves as a reminder that QDEM’s quality filter can work in investors’ favor even with controversial Brazilian and Russian stocks.
China, the largest emerging markets dividend payer in dollar terms, is QDEM’s largest country allocation at 36.9%.
As Market Vectors notes, the quality dividend factor as measured by MSCI has historically provided solid long-term returns. MSCI’s high dividend yield index features companies with a higher return on equity and lower long-term debt-to-capital ratio than the traditional cap-weighted benchmark, according to Market Vectors data.
Market Vectors MSCI Emerging Markets Quality Dividend ETF
Tom Lydon’s clients own shares of EEM.
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.