Emerging markets (EM) have definitely seen better days in terms of price appreciation. Still, as far as fixed income yields go, EM offers some of the best opportunities around as long as investors are willing to accept the risks.
Inflation fears, recession risks, and a stronger dollar have certainly done a number on EM assets in the first half of 2022. Prospective EM investors don’t want to catch the proverbial falling knife in the second half of 2022 as much market uncertainty remains.
“Slowing growth, scorching inflation, and rising U.S. interest rates are intensifying a squeeze on emerging-market finances and stoking concern over a fully-fledged debt crisis in low- and middle-income countries,” a Wall Street Journal report noted.
From a fixed income standpoint, investors looking to dabble into EM will have to be comfortable taking risks in a market environment where many unknowns exist. Bond yields, for example, offer an attractive draw when simply looking at rates, but again, investors need to understand the story behind these higher yields.
“Bond yields offer an insight into investors’ darkening assessment of some countries’ prospects,” the report added. “Yields on the long-term debt of 23 countries are currently eight percentage points or more above long-term U.S. Treasury yields, a sign of financial distress, up from 16 at the beginning of the year.”
Investors who are willing to accept the risk have options. One way is to look at exchange-traded funds (ETFs) that offer competitive yields from alternate income sources like dividends.
Extracting More Yield From EM
With a 30-day SEC yield of close to 10% (as of June 17), it’s easy to be enticed by the Global X MSCI SuperDividend Emerging Markets ETF (SDEM). The fund seeks to provide investment results that generally correspond to the price and yield performance of the MSCI Emerging Markets Top 50 Dividend Index.
The fund invests in 50 of the highest dividend-yielding equities in the Emerging Markets. SDEM carries an expense ratio of 0.67%.
Overall, SDEM offers investors:
- High income potential: SDEM accesses 50 of the highest-yielding stocks in emerging markets, potentially increasing a portfolio’s yield.
- Monthly distributions: SDEM has made monthly distributions for seven years running.
- Value with growth: Investing in high dividend-yielding securities in the emerging market space combines a value-oriented investment approach with exposure to markets that are expected to grow at a faster pace than developed markets.
For more news, information, and strategy, visit the Thematic Investing Channel.