Broader emerging markets equity benchmarks are cruising toward another disappointing annual performance, and while many investors are considering abandoning the asset class, they might want to reconsider.
One way of getting more comfortable with emerging markets stocks ahead of 2022 is to identify this year’s leaders. The ALPS Emerging Sector Dogs ETF (NYSEArca: EDOG) makes that easy because the exchange traded fund is easily outpacing the MSCI Emerging Markets Index this year.
Additionally, it pays to remember that emerging markets stocks and the S&P 500 don’t move in unison over long holdings, indicating that there are benefits to considering EDOG as an addition to domestic-heavy equity portfolios.
“Numerous studies, including those by Vanguard and Morgan Stanley, show that over extended periods, the stock returns of emerging markets and developed countries like the United States don’t move in lock step most of the time,” reports Jeff Summer for The New York Times. “Over the long term, this low correlation means that adding emerging market exposure to predominantly American investments can reduce the overall portfolio’s volatility and enhance returns.”
Not surprisingly, the near-term outlook is murky for emerging markets stocks. The asset class rarely responds well in advance of Federal Reserve rate tightening, which is expected to happen next year, because many governments in developing economies issue dollar-denominated debt.
On the bright side, emerging markets central banks are ahead of the Fed in terms of raising rates, and that could pay dividends in terms of damping inflation in 2022. For its part, EDOG offers the diversification investors need to avoid large allocations to China and other potential trouble spots in developing economies.
“Over the last 20 years or so, they have become a standard part of many long-term, diversified stock and bond portfolios, especially those made up of low-cost index funds,” according to the Times.
EDOG yields 2.96%, or 140 basis points ahead of the MSCI Emerging Markets Index. Speaking of income, emerging markets dividends are rebounding, and market observers are forecasting more growth in 2022. Rising payouts could diminish risk and support some upside for emerging markets stocks in what could be a bumpy 2022.
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.