Domestic value stocks and exchange traded funds are holding up well to start 2022 and, in many cases, are outperforming broader benchmarks.
The same phenomenon is on display with emerging markets stocks. While the MSCI Emerging Markets Index is lower by 0.59% year-to-date, the ALPS Emerging Sector Dogs ETF (NYSEArca: EDOG) is higher to start 2022.
That’s not a new trend. Albeit quietly, emerging markets value stocks have been outperforming broader benchmarks of stocks in developing economies for several months, and some market observers believe that this will continue, providing support for the EDOG thesis.
“That’s just the start of a rebound in emerging markets value stocks, long-suffering enthusiasts hope. They certainly have a valuation argument. The cheapest 20% of emerging market stocks, measured by price/earnings ratios, are way into all-time lows relative to the rest of the asset class, notes Arjun Divecha, head of emerging markets equity at GMO,” reports Craig Mellow for Barron’s.
The idea of a growth-to-value rotation in emerging markets has credibility because the prior two emerging markets bull runs were led by growth stocks, but that group fell on hard times last year due in large part to China’s ambitious regulatory crackdown that focused on internet companies.
Fortunately, EDOG is a value-oriented ETF, meaning that it leans away from controversial Chinese growth stocks. Add to that, the fund equally weights its geographic exposures, meaning its 9.83% weight to China is significantly below what’s found in traditional emerging markets indexes.
“Dividends are a big part of the draw for emerging markets value, however defined. Randolph Wrighton, portfolio manager for emerging markets at Barrow Hanley, is piling into banks, partly for their payouts,” according to Barron’s.
EDOG’s sector allocations are also equally weighted so its financial services exposure stands at 10.28% today, making it the second-largest sector weight in the ETF, behind energy at 11.07%.
Speaking of dividends, emerging markets payouts are forecast to rise this year, providing support for the EDOG investment thesis. The fund already yields 2.92%, well above the trailing 12-month yield of 2% found on the MSCI Emerging Markets Index.
Other emerging markets dividend ETFs include the ProShares MSCI Emerging Markets Dividend Growers ETF (CBOE: EMDV), the iShares Emerging Markets Dividend ETF (DVYE), and the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM).
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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.
