Geographic exposure is critical when embracing international equities. As the China regulatory controversies are confirming this year, examining an exchange traded fund’s geographic weights is critical for investors considering emerging markets equities.
Beijing targeting online education, consumer internet, and, more recently, casino companies is a reminder that even supposedly geographically diverse emerging markets ETFs can be volatile bets. The ALPS Emerging Sector Dogs ETF (NYSEArca: EDOG) is, in turn, a reminder that dividends can act as volatility reduction tools with emerging markets equities.
EDOG is all the more relevant this year with income hard to come by. The ALPS fund sports a dividend yield of 3%, or 120 basis points above what’s found on the MSCI Emerging Markets Index. As is the case with developed economies, dividends are important parts of the emerging markets investment thesis.
Aidan Garrib, head of global macro strategy and research at Pavilion Global Markets “describes how volatile price-earnings multiples have been since 2011. After moving deeply into negative territory from 2011 to 2015, they then rebounded just as far into positive territory for the next two years, then dipping again for about 15 months,” writes Yan Barcelo for Morningstar.
EDOG is all the more attractive today because, following a spate of negative action at the hands of the coronavirus pandemic last year, emerging markets payouts are on the mend and are participating in the global dividend renaissance. That growth is constructive for EDOG components even though the ALPS fund is positioned as a high dividend strategy.
As Pavilion Global’s Garrib notes, the situation in China actually underscores the importance of emerging markets dividends.
“Lofty expectations baked into the multiples are starting to unwind as the outlook for Chinese growth stocks darkens amid regulatory crackdowns and Western scrutiny. What is worse is that there hasn’t really been a structural improvement in earnings-per-share over the last decade. Emerging markets might be the future, but the future increasingly looks like it’s comprised of dividends,” he tells Morningstar.
In fact, China highlights why EDOG is worth considering. While many traditional emerging markets benchmarks allocate a third or more of their weight to Chinese stocks, EDOG has a weight of just 9.29% to the world’s second-largest economy. That makes a difference because EDOG is up just over 11% year-to-date while the MSCI Emerging Markets Index is down more than 2%.
Other emerging markets dividend ETFs include the ProShares MSCI Emerging Markets Dividend Growers ETF (CBOE: EMDV), the iShares Emerging Markets Dividend ETF (DVYE), and the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM).
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.