On the back of a 7.31% slide over the past month, the MSCI Emerging Markets Index is now saddled with a year-to-date loss of 4.20%.
China and its regulatory crackdown aimed at internet and technology companies are among rhe culprits behind that gloominess, but the decline is also a reminder to investors that emerging markets include much more than just China.
The ALPS Emerging Sector Dogs ETF (NYSEArca: EDOG) proves investors can indeed profit by limiting China exposure. That exchange traded fund, which yields almost 3%, is higher by 4.31% year-to-date. Like emerging markets assets, particularly those not related to China, EDOG may not be getting the respect it deserves.
“Emerging markets get no respect. They account for about two-fifths of global gross domestic product and a quarter of global stocks by market value, and yet they’re a fraction of most U.S. investors’ stock portfolios. If there’s ever a time to give emerging markets another look, this is it,” reports Nir Kassiar for Bloomberg.
Yield is one big reason to consider EDOG, but more important is its 9.6% weight to China.
Meanwhile, that country accounts for a third or more of other emerging markets funds and benchmarks. Russia, Thailand, and Mexico each command larger percentages of the EDOG geographic lineup.
Still, dividends and EDOG’s value purview are relevant to investors mulling emerging markets exposure over the near-term.
“Dividends and valuations play a role, too. When all three variables are considered (earnings growth is the other), emerging markets appear to be the better bet. Analysts expect a dividend yield of 3% from emerging markets, compared with 1.5% for the S&P 500. When combined with earnings growth, the advantage for U.S. stocks shrinks to 1.4 percentage points a year,” according to Bloomberg.
Stocks in developing economies trade at just 12x earnings while that figure swells to 20x for the S&P 500. EDOG enhances that value proposition by being an equally weighted fund – a methodology that often tilts toward the value factor.
Additionally, earnings growth could transition to be in favor of emerging markets.
“Given that recent earnings growth has been unusually high in the U.S. and strangely low in emerging markets, the roles may reverse for a while, bringing earnings growth between them closer to parity,” adds Bloomberg.
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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.