There is much near-term uncertainty about the crisis in Ukraine and its impact on emerging market economies. However, the current environment offers an opportunity for investors to reallocate to local markets at an opportune time from a valuation perspective.
“We believe emerging markets are well positioned to withstand the current geopolitical and economic shocks since most emerging market central banks began tightening monetary policy last year – well ahead of their developed market peers,” Invesco’s Wilm Vandenhoeck, senior portfolio manager, and Meral Karasulu, director of fixed income research, wrote in an insight.
The resilience of the asset class was demonstrated by the outperformance of emerging market local bonds (excluding Russia) versus the broad U.S. equity market during the second half of February, when the conflict escalated, according to Vandenhoeck and Karasulu.
A strong offering to consider adding exposure to is the ALPS Emerging Sector Dividend Dogs ETF (EDOG), which applies the Dogs of the Dow Theory on a sector-by-sector basis, using the S-Network Emerging Markets Index as its starting universe of eligible securities.
The Dogs of the Dow theory posits that dividends are more or less constant while prices vary, and therefore stocks that have a high dividend yield but trade at a depressed price are poised to appreciate, according to ETF Database.
The strategy provides high dividend exposure across all sectors of the market by selecting the five highest-yielding securities in 10 of the 11 GICS sectors (excluding real estate). In addition, the country representation is capped at five eligible securities per country, according to ALPS.
The fund holds an equal-weighted basket of 50 large-cap emerging market stocks selected on the basis of high dividend yield, according to ETF Database. Equally weighting at the stock and sector level may provide diversification while avoiding sector biases.
EDOG’s underlying index, EDOGX, carries a dividend yield of 7.75%, which far exceeds a comparable benchmark yield for the Morningstar Emerging Markets Index (MEMMN) of 2.88%, as of the end of February, according to ALPS.
EDOG’s price-to-earnings ratio (P/E ratio) decreased in February to 7.56x from the month prior and remains at a sizable discount to that of the Morningstar Emerging Markets Index P/E of 13.53x, making now a strong time to add exposure to the fund.
When looking to add emerging markets exposure, other funds to consider include the BNY Mellon Emerging Markets Equity ETF (BKEM) and the Schwab Fundamental Emerging Markets Large Co. Index ETF (FNDE).
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