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ETF News And Commentary

Neena Mishra, CFA

Top Three Emerging Market Dividend ETFs For Income And Growth

DEM DGS EDIV

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Treasury bond yields are now touching their all-time lows as the fears over a possible Greek exit and concerns over the Spanish banking system continue to push the investors towards “safe haven assets”. 

The benchmark 10-year Treasury note reached 1.625% today and at these yield levels these assets have become very risky due to  potential loss when the rates start rising.

Further with the current inflation rate at around 2.3%, the investment in Treasury bonds will most likely result in loss of principal in real terms, even if the bonds are held till maturity.

As a result, 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:Top Two Emerging Market USD Bond ETFs Head-to-Head)

Emerging markets currently represent about one-third of global GDP and their share will continue to grow in the coming years. As such they ought to be a part of any investment portfolio. The IMF projects that the emerging economies will grow 5.7% in 2012, versus 1.4% growth for the developed economies. Further the emerging markets companies often offer a higher rate of dividend yield compared with the domestic companies. (Read- Guide to Small Cap Emerging Market ETFs)

Below we have analyzed top three ETFs (in terms of AUM) 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 fund has currently has $3.6 billion in assets under management and charges 63 basis points annually for operating expenses.

The funds assigns heaviest weight to Financials (25.4%), followed by Telecom (20.7%) and Information Technology (14.6%). In terms of country allocations, Taiwan is at the top (23.1%), followed by Brazil (20.1%), South Africa (10.0%) and Malaysia (9.7%). Year-to-date, the fund has returned 1.99%. Its annual dividend yield is 4.51% versus average US dividend yield of less than 2%.

WisdomTree Emerging Markets SmallCap Dividend Fund (DGS - ETF report)

The Fund tracks the WisdomTree Emerging Markets SmallCap Dividend Index that is primarily composed of small cap stocks selected from the WisdomTree Emerging Markets Dividend Index.

 In terms of sector exposure, financials occupy the top spot (21.8%), followed by Industrials (19.2%) and Information technology (13.8%). For country weightings, the top three spots are occupied by Taiwan (26.7%), Thailand (13.1%) and South Africa (10.7%). The fund currently manages assets worth $917 million and trades about 168,000 shares per day.

 The ETF charges expense ratio of 63 basis points annually and is up 5.81% year-to-date. In addition to price appreciation, the current dividend yield at 3.9% is pretty attractive. (Read: Top Three Emerging Market Consumer ETFs)

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 and has so far attracted $280 million in assets.

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 (24.7%), Brazil (14.0%) and China (11.1%).

The expense ratio for this fund is 0.59%, lowest among the three ETFs, presented here. The fund had a negative return of 5.39% year-to-date, which is somewhat compensated by its soild dividend yield of 4.95%.

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