Excellence in Emerging Markets Income | ETF Trends

Dividends can help smooth out of some of the turbulence associated with emerging markets investments and there are examples of dividend ETFs topping traditional emerging markets funds.

For example, the ProShares MSCI Emerging Markets Dividend Growers ETF (CBOE: EMDV) is beating the MSCI Emerging Markets Index by 100 basis points this year. EMDV follows the MSCI Emerging Markets Dividend Masters Index, which targets MSCI Emerging Market components that have increased dividend payments each year for at least seven consecutive years.

The index contains a minimum of 40 stocks, which are equally weighted. No single sector may comprise more than 30% of the index, and no single country may compose more than 50% of the index.

In dollar terms, China is the largest emerging market dividend payer and one of the emerging world’s most reliable sources of dividend growth. Many emerging markets dividend ETFs, including the aforementioned EMDV, reflect as much. EMDV allocates nearly 30% of its weight to Chinese dividend stocks.

Companies that grew dividends outperformed companies that didn’t. Companies that consistently grow their dividends tend to be high-quality with strong growth potential. These types of companies were able to withstand periods of market turmoil and still deliver strong returns with lower volatility.

Dividend Growers Capturing Upside

Dividend growers also tend to capture most of the upside potential during bull rallies and limit downside risk or capture a lower percentage the downside. When the markets experienced wild swings, dividend aristocrats remained on a relatively more stable footing.

Translation: EMDV is often less volatile than the MSCI Emerging Markets Index, particularly when the latter declines.

EMDV’s dividend yield is below that of the MSCI Emerging Markets Index but is more of an advantage than a drawback.

Related: It May Finally be Time For Europe ETFs To Score 

Dividend growth rather than high yield can be a potent, less risky long-term income strategy. Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts.

South Africa and India combine for almost 35% of EMDV’s weight and the fund features no exposure to the energy sector, recently an emerging markets dividend offender. Financial services and consumer staples stocks combine for over 41% of the fund’s weight.

For more on core investing strategies, please visit our Core ETF Channel.

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.