Emerging markets might have been broadly out of favor this year thanks to their heightened vulnerability to the Fed’s QE taper process, but this hasn’t dissuaded ETF sponsors from putting out new products in the space.
However, considering the present fragile scenario, fund issuers seek to tap this corner of the market where one can be assured of some steady payouts. And what could be a better option for a regular source of assured income other than dividend investing?
To quench investors’ yield thirst at a time when bond yields are rising in the U.S., marring the appeal for dividend investing back home, ALPS is introducing a dividend product in the emerging market space. The new member in ALPS’ fund family hit the market on March 28, 2014 and trades under the name of The ALPS Emerging Sector Dividend Dogs ETF (EDOG - Free Report) .
Notably, ALPS seems keen on designing dividend products. Prior to this, it had rolled out similar themed products on the U.S. and international markets under the name of ALPS Sector Dividend Dogs ETF (SDOG) and ALPS International Sector Dividend Dogs ETF (IDOG) (read: ALPS Launches Sector Dividend Dogs ETF (SDOG - Free Report) ).
EDOG in Focus
The product will track the S-Network Emerging Sector Dividend Dogs Index, which will give exposure to a basket of large-cap and high yield stocks domiciled in emerging markets. The index takes up an equal-weighted approach in order to assign weights to securities.
The index applies the ‘Dogs of the Dow’ Theory in stock selection process. The index takes the top five dividend yielders in each of the 10 Global Industry Classification Standard (“GICS”) sectors making up the S-Network Emerging Markets for inclusion in the final portfolio. EDOG looks to fully replicate the underlying index which is rebalanced quarterly.
The product looks to hold about 50 stocks with this approach. The stocks are picked up from about 16 counties. The ETF offers a solid level of diversification as both sector and country exposure is limited to five securities.
The fund puts less than 25% of its total assets in the top 10 holdings thus indicating low company specific concentration risk (read: First Trust Launches 3 Innovative Income ETFs).
No stock accounts for more than 2.18% of the basket. FOSCHINI GROUP LTD, CEZ and Ecopetrol SA occupy the top three positions. Information Technology, Consumer Staples and Industrials are the top three sectors of the portfolio. The new product looks to charge investors 60 basis points a year in fees.
Concentration risk from the national perspective appears not very high with Brazil, China and Turkey – top three players – accounting for weights in excess of 10%. Several other nations round out the top seven —including Thailand, Malaysia, South Africa and Indonesia with above 8% exposure – which also look more or less equally weighted.
However, about six nations receive less than 2.5% of the total portfolio each, pointing to moderate geographic concentration.
How does it fit in a portfolio?
Obviously, this ETF is designed to be an income solution for investors. It could also offer investors an offbeat way to play emerging markets (read: Emerging Markets Dividend ETFs for Income, Growth & Diversification).
Further, though the Fed has hinted at an eventual rise in interest rates, the hike is unlikely to hit before mid 2015. Till then, investors can easily look for some other high-yielding avenues. Also, thanks to the nagging taper fear since mid last year, many of the emerging market equities have seen huge sell-offs and are trading at cheap valuations at the current level.
Thus, through EDOG, investors may be able to take in some capital appreciation (hopefully) along with a steady stream of current income. The appeal of the ‘dogs theory’ in any market is less likely to be ruled out by a host of income-centric investors, especially those who are looking for strong levels of diversification across sectors.
While EDOG may have some favorable metrics, the ETF will be facing some competition for assets in the dividend-focused emerging ETF market. However, the space is still not overcrowded with a handful of ETFs operating in this specialized emerging market segment (read: EGShares Launches New Emerging Market Dividend ETF).
The most popular product in the space is the WisdomTree Emerging Markets Equity Income Fund (DEM) which also ranks third (with about $4.0 billion of assets) in the overall emerging market space. The second best product SPDR S&P Emerging Markets Dividend ETF (EDIV) also has decent daily trading volume levels and ample assets under management.
There are a few other products like iShares Emerging Markets Dividend ETF (DVYE), Low Volatility Emerging Markets Dividend ETF (HILO - Free Report) and EGShares Emerging Markets Dividend Growth ETF (EMDG) which could pose threats to this newly launched ALPS ETF.
Barring EMDG, all of the new ALPS fund's competitors pay dividend yields in the range of 4.50% to 5.20%. So, EDOG needs to offer a sizable yield to attract investors’ attention. Expense-ratio wise, EDOG looks reasonable as it charges less than many of its immediate peers.
The fund might stumble to start its journey on broader emerging market weakness. But we believe that emerging market sell-offs will complete at some point of time this year and when these products bottom out, EDOG should be able to catch up and amass investors’ assets in hopes of a run-up once more in this space.
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