With less than two months to go in the year, investors are probably tired of hearing about the disappointing performances turned in by emerging markets stocks and exchange-traded funds this year.
Of particular concern to income investors is that emerging markets dividend ETFs are trailing traditional funds, such as EEM and VWO, in significant fashion.
Consider this: The $1.46 billion WisdomTree Emerging Markets High Dividend Fund (DEM), one of the most popular names among emerging markets dividend ETFs, has tumbled nearly 18% this year.
Some emerging market dividend ETFs have been much worse than that, notching losses that deal blows to the notion that dividend stocks and funds hold up better than their non-payout counterparts in rough markets.
Developing world dividend ETFs have been pinched by an array of factors, including payout cuts and suspensions by major Chinese banks earlier this year, as well as speculation that sagging oil prices will force Russian oil producers to pare payouts.
That is bad news for an emerging markets dividend ETF such as the aforementioned DEM, which allocates nearly 29% of its combined weight to Chinese and Russian stocks.
On the bright side, falling prices have made the yields on some emerging markets dividend ETFs too tempting too ignore. For its part, DEM sports a trailing 12-month yield of about 5%, signalling that the darkest dividend clouds may have already passed for developing world equities.
For the adventurous, albeit patient, income investors, here are some other ideas to consider when scouring the developing world for dividend ETFs.
SPDR S&P Emerging Markets Dividend ETF (EDIV)
The SPDR S&P Emerging Markets Dividend ETF (EDIV) has been notably worse than DEM this year, down more than 23% this year. Given its reputation as one of the most volatile emerging markets, it is not surprising that Russia has been a problem for EDIV.
What is surprising, as it pertains to this dividend ETF, is why Russia has been a thorn in the fund’s side. Simply put, EDIV does not have enough exposure to Russia. This EDIV ETF devotes just 1.85% of its weight to Russian stocks — not good in a year in which the country is home to the best-performing BRIC equity market.
Another issue for EDIV has been China, which accounts for nearly 10% of the ETF’s weight. According to a report in Portfolio Adviser:
“Emerging markets (dividends) were notable laggards for the quarter, with dividends from China set to fall in 2015 for the first year on record. They are currently down 2.1% year on year. Henderson blamed the impact of the economic slowdown on profits and payouts. This was not confined to the industrial parts of the economy, where weakness might be expected as the country transitions to a new economic model, but extended to areas such as the banks: the China Construction Bank, for example, made its smallest increase in years, while China Citic Bank cancelled its distribution altogether. The weakness rippled out across Asia-Pacific ex-Japan, though currency was the major factor elsewhere.”
EDIV, a dividend ETF with a trailing 12-month yield of nearly 5%, does devote roughly 30% of its weight to Taiwan and South Korea. Which is advantageous for conservative investors, as although EDIV does not scream “conservative,” South Korea and Taiwan are two of the least volatile emerging markets.
Additionally, Taiwan has one of the most favorable dividend policies in the developing world while South Korea’s cash-rich companies are finally warming to buybacks and increased payouts, making EDIV a dividend ETF to consider.
EDIV’s annual expense ratio is 0.49%, or $49 per $10,000 invested.
WisdomTree Emerging Markets Quality Dividend Growth Fund (DGRE)
The WisdomTree Emerging Markets Quality Dividend Growth Fund (DGRE), the dividend growth peer of the aforementioned DEM, is one of the smaller ETFs on the emerging market, but that size belies the long-term potential of this dividend ETF.
DGRE is a dividend ETF that benchmarks to the WisdomTree Emerging Markets Quality Dividend Growth Fund Index, which is a fundamentally weighted, or “strategic beta” index in ETF industry speak.
“The Index is comprised of the top 300 companies from the eligible universe with the best combined rank of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets. Companies are weighted in the Index based on annual cash dividends paid.”
Like EDIV, DGRE is light on exposure to Russia, but this dividend ETF makes up for that with a 16.5% weight to Brazil, one of the most volatile emerging markets. Taiwan, China and South Africa combine for 42% of DGRE’s weight.
DGRE, like other emerging market dividend ETFs, is reflective of the current valuation state of affairs in the developing world. With a dividend yield of just under 4%, this dividend ETF’s underlying index trades for less than 12 times earnings. In comparison, the S&P 500 trades at a multiple of around 17.
DGRE’s annual expense ratio is 0.63%.
As of this writing, Todd Shriber was long DEM.