It's often said that, at least among U.S. equities, when stocks decline, dividend payers usually perform less poorly than their non-dividend counterparts. If that is indeed the case, and historical suggest it is, than the last few of emerging markets turbulence was particularly disappointing for investors that embraced dividend-based strategies because some of those products performed even worse than funds that were not dedicated to dividends.
However, emerging markets stocks and exchange traded funds are roaring back this year and dividend ETFs are participating in that rally. In some cases, emerging markets dividend ETFs are displaying leadership. Just look at the WisdomTree Emerging Markets High Dividend Fund (NYSE: DEM).
The Vanguard FTSE Emerging Markets ETF (NYSE: VWO) and the iShares MSCI Emerging Markets ETF (NYSE: EEM) are up an average of 15.9 percent year-to-date, but DEM is higher by 22.4 percent while being only slightly more volatile than EEM and VWO.
DEM's underlying index, the WisdomTree Emerging Markets High Dividend Index, makes good on the high dividend promise with a dividend yield of over 5.1 percent. The MSCI Emerging Markets Index has a trailing 12-month yield of 2.1 percent.
In addition to its dividend advantage, DEM has geographic advantages. Although China is DEM's second-largest country weight, the WisdomTree ETF's allocation to Chinese stocks is 13.8 percent, or nearly 1,100 basis points less than that of the MSCI Emerging Markets Index. That is advantageous in a year in which Chinese stocks are lagging broader emerging markets benchmarks.
Additionally, DEM's 13.3 percent weight to Russian stocks is an advantage when that market is rallying, which it is this year. In fact, Russia is one of this year's best-performing emerging markets. DEM's weight to Russian equities is more than triple that of the MSCI Emerging Markets Index.
Moscow has previously taken a heavy-handed approach to dividends paid by state-controlled enterprises, making Russia one of the highest-yielding and fastest-growing dividend destinations among emerging markets. However, Moscow's dividend efforts were crimped by falling oil prices the past couple of years and there are concerns about the impact renewed dividend largess will have some corporate credit profiles.
The Kremlin is pushing some Russian companies, including Gazprom OAO, DEM's third-largest holding, to distribute up to 50 percent of profits in the form of dividends. Not surprisingly, policies like this come about because the Russian government is often the largest shareholder in the firms in which it pushes to boost dividends, but DEM investors benefit as well.
Disclosure: Todd Shriber owns shares of DEM.
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