Guide To Emerging Markets Dividend ETFs

Treasury bond yields in the U.S. are back near lows, as the Fed Taper appears to be off the table for the time being. This is of course after a string of poor data points which suggest that the economy might not be as strong as we initially thought.

As a result, many income oriented investors now look for companies with solid balance sheets that pay stable dividends. But many domestic dividend paying companies are mature and large, and thus do not offer the growth potential shown by some newer, smaller companies.

An attractive option for such investors is to pick 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 (see Emerging Markets Dividend ETFs in Focus).

Emerging markets under the microscope

Emerging markets currently represent about one-third of global GDP and their share will continue to grow in the coming years. The emerging economies have been beaten down this year due to macroeconomic and political concerns in India, the property market in China, and persistent inflation and interest rates hike issues in Brazil.

Additionally, most of these nations are commodity-centric economies that make them highly susceptible to any downtrend in the global economy. Further, currency declines against the greenback have hit hard both equity and debt markets in the emerging economies, adding to their woes.

Despite these weak fundamentals, emerging market ETFs ought to be part of any investment portfolio. The International Monetary Fund (IMF) projects that the emerging economies will grow 5.9% in 2013 compared to 1.9% for developed countries and 2% for the U.S. These nations could be interesting plays in the future as their valuations are quite favorable at the current levels.

Further, many emerging market companies often offer a higher rate of dividend yield compared with the domestic companies (see Are There Really High-Dividend, Low-Risk ETFs?). There are now some quality choices in emerging markets that can provide investors with outsized payouts on a regular basis.

In particular, there are five great choices in this space focusing on high dividend paying stable companies in emerging markets.

WisdomTree Emerging Markets Equity Income Fund (DEM)

This fund tracks the WisdomTree Emerging Markets Equity Income Index, which measures the performance of the highest dividend yielding stocks selected from the WisdomTree Emerging Markets Dividend Index.

With a total of 237 stocks in its basket, the product is widely spread across individual securities with just 32% of its assets in the top 10 holdings. The top three firms – China Construction Bank, Gazprom and Industrial & Commercial Bank – comprise about 16.72% of the combined share in the basket.

The fund is heavy on financials, closely followed by energy, materials and telecommunication services. In terms of country allocations, Taiwan is at the top (20%), followed by China (16.3%), Russia (11.9%) and Brazil (11.4%).

The product appears rich with AUM of about $5.2 billion and average daily volume of more than 760,000 shares. The ETF charges 63 bps in fees per year from investors. The fund has lost about 7.5% year-to-date but has an annual dividend yield of 3.00% versus the average US dividend yield of about 3.5% (see 4 Excellent Dividend ETFs for Income and Stability).

WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)

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. It holds over 500 securities in the basket and offers wide diversification as it puts little in each security.

None of the securities holds more than 1.25% of the assets, eliminating company-specific risk. In terms of sector exposure, financials take the top spot with roughly one-fourth of the assets, while industrials, consumer discretionary and materials rounded up to the next three spots in the basket (see Banking ETFs: Laggards or Leaders?).

The product has amassed about $1.8 billion in AUM and trades in good volume of more than 215,000 shares per day. It charges a relatively high annual fee of 64 bps from investors for the diversity in its portfolio.

In terms of individual countries, Taiwan and Thailand enjoy the maximum allocation with a share of 22.2% and 11.8%, respectively, while South Korea, Malaysia and Turkey get single-digit allocation with a share of 9.4%, 9.4%, and 7.6%, respectively.

DGS has lost less than 3% year-to-date. However its solid yield of about 3.1% and its growth potential makes this ETF an interesting play.

SPDR S&P Emerging Markets Dividend ETF (EDIV)

EDIV tracks S&P Emerging Markets Dividend Opportunities Index, consisting of dividend paying securities of 100 publicly-traded companies in emerging markets. The ETF has so far attracted $560 million in assets and trades in volume of roughly 120,000 shares per day.

Holding 124 securities, the fund puts about 33.4% of total assets in top 10 firms, suggesting moderate concentration across each security. It is pretty spread well among various sectors with utilities being the top sector having less than 20% share. The top three countries are Brazil (22.66%), Taiwan (18.07%) and Turkey (9.95%).

The expense ratio for this fund is 0.59%. The fund had a rough 2013, losing over 12% YTD. However, it does pay out a solid yield of almost 4.9%, and it is up 5.8% in the past three months (see Have You Overlooked These Dividend ETFs?).

iShares Emerging Markets Dividend Index Fund (DVYE)

This ETF, which debuted in Feb 2012, is a relatively new addition to the Emerging Markets Dividends ETF. The product is designed to compete with the popular DEM by providing a lower cost alternative to the investors, while fulfilling a similar investment objective.

The fund seeks to replicate the Dow Jones Emerging Markets Select Dividend Index. Like DEM, it is also exposed to the financials (18.31%) followed by basic materials (17.38%) and utilities (14.27%). The product holds 101 stocks and thus focuses on a smaller group of companies compared with DEM. The fund puts 22.12% of assets in the top 10 firms and none of the securities holds more than 4.2% of the assets.

Taiwan leads the country allocation with 26.8% weight, followed by Brazil (15.1%) and Turkey (8.9%). The ETF has attracted $139.8 million in AUM while charging 0.49% in annual fees from investors. It trades in average daily volume of 28,000 shares.

DVYE has delivered negative returns of nearly 10% so far this year, which is somewhat compensated by an annual dividend yield of 3.9%.

EGShares Low Volatility Emerging Markets Dividend ETF (HILO)

HILO is an ideal option for investors seeking to benefit from high dividend yield and high growth potential of the emerging market companies while trying to avoid excess volatility associated with some companies.

HILO tracks INDXX Emerging Market High Income Low Beta Index, designed to provide high income and be significantly less volatile through the utilization of low beta stocks. The index has a beta of 0.94 vs. MSCI EAFE Index. Further, the Index limits concentration in any position to 5% and country exposure to a maximum of 5 positions in the fund.

In terms of country exposure, South Africa (21.1%), Turkey (17.0%), Mexico (13.4%) and Malaysia (11.6%) occupy the top spots (see Turkey ETF: Still a Strong Play?). The fund holds 30 securities and has managed assets of $100 million. The ETF is tilted towards the consumer goods (20.8%), industrials (16.6%) and financials (15.7%) sectors.

The product charges a fee of 85 bps annually and is less liquid with trading volume of roughly 50,000 shares per day. The ETF is down 0.7% on the year and yields a solid 5.4% right now.

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