Seeking to Dial Back Your Exposure to China?

Income investors that embrace international stocks are facing a conundrum when it comes to emerging markets.

Developing economies often sport higher dividend yields than broader U.S. equity benchmarks and China is the biggest emerging markets dividend payer in dollar terms. Yet as investors well know, China is now a financial minefield owing to Beijing’s regulatory efforts against internet and technology companies.

The ALPS Emerging Sector Dogs ETF (NYSEArca: EDOG) is one way investors can access emerging markets payouts while dialing back China exposure. EDOG could prove to be an ideal near- to medium-term idea for investors seeking emerging markets exposure.

“While we are bearish on Chinese equities for US investors, we are bullish on EM broadly and on India in particular. For the long term, these economies benefit from favorable demographics, modernization potential, and generally attractive valuations,” said Bank of America analysts in a recent note.

China is EDOG’s third-largest country weight and while that may sound problematic in the current environment, the world’s second-largest economy accounts for just 9.73% of EDOG’s geographic exposure, as compared to 34.74% in the MSCI Emerging Markets Index.

With a 30-day SEC yield of 3.87%, EDOG is sure to appeal to some income-starved investors. However, the ETF’s geographic structure may be even more appealing than that yield.

“Emerging markets ex-China (EMxC) will contribute nearly a third of 2022 global GDP growth ($21.2tn of $93.8tn, per the IMF). Yet their allocation is very small in most portfolios, representing just 12% of global equity market capitalization. We expect this allocation to rise in coming years,” according to Bank of America.

In other words, there are still good reasons to be engaged with developing economies today. Not surprisingly given its cyclical lean, there’s also a valuation case for EDOG.

“A crucial shift to monitor is what happens to the premium investors are willing to pay for access to riskier Chinese corporate profits. EMxC and China trade today at about 15x earnings. Stocks in countries like Turkey and Russia trade around 5-7x,” adds Bank of America.

Russia is EDOG’s largest country weight at 10.42% while Turkey checks in at 2%.

Other emerging markets dividend ETFs include the ProShares MSCI Emerging Markets Dividend Growers ETF (CBOE: EMDV), iShares Emerging Markets Dividend ETF (DVYE), and WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM).

For more on cornerstone strategies, visit our ETF Building Blocks 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.