Improving macroeconomic conditions are feeding into higher demand for emerging market (EM) ETFs. January was followed up by another strong month in February, as inflows into EM equity funds reached record levels.
“EM equity ETFs sucked in $28.2bn, an increase of more than 20 per cent on the previous record set in January of $23.3bn and a third of the $85.5bn in total captured by equity ETFs globally during the month, according to BlackRock,” reported the Financial Times.
The anticipation of interest rate cuts certainly has a hand in feeding the investor optimism. A weakening dollar should continue to spark demand for EM assets, resulting in more flows to ETFs. While China may be the top economy in the EM space, it wasn’t representative of the broader interest that EM ETFs have been garnering. That’s especially the case as the country continues to work through its economic struggles.
“I think EM flows [from outside China]may have been obscured recently with the outflows from China masking the inflows into India and other countries,” said Peter Sleep, senior portfolio manager at 7 Investment Management. “China seems to be less negative now, which makes broad EM look a bit better.”
Get a Jump on Dividends
Fixed income investors eyeing the EM space for potential opportunities may want to get a jump on the future strength of EM by also looking at dividends. Interest rate cuts and a weakening dollar should help feed into the bottom line of EM companies. That would improve dividend-paying prospects. If that’s the case, investors may want to look at an all-encompassing option as opposed to hand selecting individual dividend-paying stocks themselves.
A prime option to consider is the ALPS Emerging Sector Dividend Dogs ETF (EDOG), which applies the dividends of the Dow approach. Essentially, EDOG chooses the five firms with the highest dividend yield in 10 sectors. Then, the fund weighs its holdings equally. That reduces concentration risk to minimize volatility.
The fund, as of February 29, has a 30-day SEC yield of 5.39% and makes distributions quarterly. Furthermore, it invests across a broad spectrum of geographic locations. Those include Thailand, Mexico, Malaysia, and Indonesia, offering fixed income investors more diversification. With rate cuts potentially coming, EDOG is a prime option to consider to add an additional income stream.
VettaFi LLC (“VettaFi”) is the index provider for EDOG, for which it receives an index licensing fee. However, EDOG is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of EDOG.
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