Risk and Reward With an Emerging Markets Dividend ETF

Emerging markets stocks and exchange traded funds have been drubbed again this year. Those ETFs focusing on emerging markets dividend payers have not been exceptions to that rule. For example, the SPDR S&P Emerging Markets Dividend ETF (NYSEArca: EDIV) has tumbled 23.4% year-to-date.

Emerging markets dividend growth has outpaced developed world payout growth over the past decade and market observers expect that trend to continue, but some advisors and investors gloss over emerging markets dividend exchange traded funds.

Among other factors, EDIV has had to contend with dividend cuts from Chinese banks. Amid rising bad debt, three of China’s four largest banks earlier this year announced payout cuts with one, China Citic Bank Corp., scrapping its dividend altogether, according to Bloomberg.

China is EDIV’s third-largest country weight at almost 14% while finanicals are the ETF’s largest sector allocation at over 25%. In recent years, China has become the largest emerging markets dividend payer in dollar terms, a perch reached in large part due to banks’ dividend growth. [China’s Dividend Growth Story]

EDIV also features a combined weight of over 26% to utilities and telecom stocks. Along with financials, those three sectors have some of the largest concentrations of state-controlled enterprises in the emerging world.

“The 5% yield is no doubt tantalizing but it’s important to recognize how that dividend is achieved and how much risk is involved in obtaining it. Not surprisingly, the fund has performed poorly as emerging markets have been hammered over the last year or more. The fund is down a total of 24% over the past one-year period and 35% since inception,” according to a Seeking Alpha analysis of SDIV.