It has been an ugly decade for most emerging markets. As a sector, they’ve been beaten like the proverbial red-headed stepchild.
First, there was the 2008 meltdown. As the old Wall Street maxim goes, when the United States sneezes, the developing world catches a cold. That’s pretty well sums up what happened during our mortgage crisis. In 2008, the S&P 500 lost about 37% of its value. The popular MSCI Emerging Markets index lost fully half of its value.
But then, a funny thing happened. The U.S. economy finally hit bottom, and U.S. stocks began an epic rally that continues to this day.
Alas, I can’t say the same for emerging markets. About the time the U.S. economy stabilized, Europe slid into a major crisis with Greece and the other “peripheral” economies that would last, off and on, for the next four years.
Europe, like the U.S., is an important export market for many emerging markets. So weakness in the Old World put a major wet blanket on an emerging market recovery.
And if only that were the end of it…
We also had a major commodities and energy bust, major unrest in the Arab world and a string of corruption scandals in Latin America … all of which sent investors running for the doors.
But then, a funny thing happened. By early 2016, the bad news was finally fully priced in, and emerging markets found a bottom. It has been off to the races ever since.
If you time a bull market in emerging market stocks correctly, you can make an absolute killing, doubling or tripling your position or more in just a few years. And I believe that’s the position we find ourselves in today. After years of chaos and upheaval, emerging markets are finally ready to shine again.
That brings me to my favorite ETF for 2018: the iShares Emerging Markets Dividend ETF (NYSEARCA:DVYE).
“Emerging markets” and “dividend stocks” might seem like an odd pairing. After all, emerging market stocks have a reputation for being risky, whereas dividend stocks are for the proverbial widows and orphans living on a pension.
But that’s precisely the appeal of DVYE. We get the “sizzle” of emerging markets, but we’re getting a more stable and reliable subset of the emerging market universe.
Furthermore, DVYE has vastly superior sector diversification. Most emerging-market ETFs are loaded up with banks and oil companies. DVYE’s bets are far more evenly spread. Yes, financial services are still the largest single allocation, at 16.8%. But that’s modest compared to the popular iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), which has fully 23.4% invested in financials.
DVYE also has 14.4% invested in technology, 13.3% invested in communications technology and 13.2% invested in utilities. Expenses are 0.49%.
Looking at country exposure, Taiwan makes up the largest allocation, at 25.5%, followed by China at 13.8. Russia, Thailand and Brazil round out the top five at 12.3%, 12.2% and 7.7%. So, DVYE has diversified exposure spanning the globe.
Let’s talk dividends. DVYE currently yields 4.2%, which is very competitive in this market. Now, you know as well as I do that dividends will make up only a small part of the total return if we get a proper bull market in emerging market stocks. But I still like collecting the dividend because it makes the inevitable pullbacks a little less painful. It’s nice to know you’re still getting paid a consistent cash income even if your ETF is moving sideways or down over the short term.
It’s still early in the year — far too early to know what the dominant trends will be. But if I’m right about emerging markets taking the lead this year, then DVYE should enjoy a very healthy rally this year. Total returns of 20%-30% in a year would be par for the course.
Returns like those come at the cost of higher volatility, of course. So, as with any investment in emerging markets, you should expect DVYE to be volatile and size your positions accordingly.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing he was long DVYE stock.