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With the safer fixed income instruments such as Treasury bonds and high-grade corporate bonds yielding meager returns, many income oriented investors now look for companies with solid balance sheets that pay stable dividends.  But most domestic dividend paying companies are mature, larger companies that do not offer the growth potential that some newer, smaller companies offer. An attractive option for such investors is to invest in the Emerging Market Dividend ETFs that combine the opportunity to benefit from the higher growth potential in the emerging markets with the steady flow of dividend income. (Read Three Overlooked Emerging Market ETFs)

Emerging markets investments should be a part of any diversified portfolio due to their low correlation with the developed markets assets as also their higher growth potential. The IMF projects that the emerging economies will grow 5.4% in 2012, versus 1.2% growth for the developed economies. Further the emerging markets companies often offer a higher rate of dividend yield compared with the domestic companies.

Investors should however remember that the higher returns from emerging markets are also accompanied with higher volatility. In times of heightened global uncertainty, emerging markets exhibit greater correlation with the developed markets and underperform them as the investors seek safer assets. During the second half of last year, the emerging markets fell sharply but as the fears of a global recession ebbed, the investors flocked to chase higher returns offered by these post sell-off attractively priced assets. (Read-India ETFs on The Rise)

MSCI Emerging Market Index has returned 17.61% year-to-date compared with 8.91% for S&P 500. Further the emerging market ETFs that do not hedge their currency exposures also benefit from the rising currencies of those countries.

The investors could consider the following ETFs that invest in high dividend paying stable companies in emerging markets.

WisdomTree Emerging Markets Equity Income Fund (DEM - ETF report)

DEM tracks the WisdomTree Emerging Markets Equity Income Index, which is a fundamentally weighted index that measures the performance of the high dividend yielding stocks in emerging markets.

The funds assigns heaviest weight to Financials (26.5%), followed by Telecom (19.6%) and Information Technology (13.8%). In terms of country allocations, Brazil is at the top (22.2%), followed by Taiwan (21.1%), South Africa (9.8%) and Malaysia (9.0%). The fund charges 63 basis points annually. It had total return of 30.98% and average annual return of 6.11% since inception. Year-to-date, the fund has returned 15%. Its dividend yield is 3.89% versus average US dividend yield of less than 2%.

Emerging Markets Dividend Index Fund (DVYE - ETF report)

This ETF introduced very recently (February 24, 2012), is designed to compete with the popular WisdomTree ETF mentioned above by providing a lower cost alternative to the investors, while fulfilling similar investment objective.

The fund seeks to replicate the Dow Jones Emerging Markets Select Dividend Index. This fund is less exposed to the Financials (13.7%) compared to DEM, with top weighting assigned to Industrials (17.5%) and Telecom (16.2%). Taiwan leads the country allocation with 23.6% weight, followed by Brazil (13.5%) and South Africa (11.6%). The fund holds 99 stocks and thus focuses on a smaller group of companies compared with DEM (293 holdings). The underlying stocks are selected on the basis of dividend yield. The ETF currently charges 0.49% to the investors. The adviser to the fund has agreed to waive a part of its management fee to limit the expense ratio at this level through the end of December 2014.

SPDR S&P Emerging Markets Dividend ETF (EDIV - ETF report)

EDIV tracks S&P Emerging Markets Dividend Opportunities Index, consisting of dividend paying securities of 100 publicly-traded companies in emerging markets. The ETF was launched in February last year. Currently, it is heaviest weighted in financials (25.4%), followed by Information Technology (21.6%) and Materials (15.4%). Country weights for the top three are Taiwan (25.5%), Brazil (14.4%) and China (11.8%).

The expense ratio for this fund is 0.59% and its dividend yield is 4.22%. It has returned a solid 14.8% year-to-date.

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