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Time for These EM Dividend ETFs?

Zacks Equity Research

Now that the Fed has kept it rate unchanged and gave hints of a slower rate hike trajectory going forward, the coast became clear for the emerging market (EM) ETFs. The assurance of a few more days of cheap dollar inflows should keep the emerging market securities in fine fettle.

This is especially true for the high-dividend paying EM equities. Investors should note that the yield on 10-year U.S. Treasury bonds have now fallen to the August 2012 level as fears over Britain’s possible exit from the European Union, its ripples in the global investing and concerns over the health of the U.S. labor market continue to push investors towards safe haven assets (read: High Quality Dividend Stocks & ETFs for Uncertain Markets). 

This plunge in yield increased the hunger for regular source of current income among investors. As foreign investors normally park their money in the riskier emerging market bloc for higher yields, the present scenario calls for a winning combination for the EM dividend equities or ETFs.

Scope for Capital Appreciation?

Though most of the research houses are apprehensive of slowing emerging market growth and its shockwaves on the other parts of the globe, investors should note that a dovish Fed may fuel an EM rally, at least for the near term.

One of the reasons behind this is a likely soggy greenback which in turn will cushion the emerging market currencies. The strengthening exchange rates of EM nations against the U.S. dollar should lead to an uptrend in EM equities.

Moreover, most of the emerging markets are commodity-centric. While the commodity market saw enough of bear days previously, the year 2016 has opened a page for its outperformance (read: Commodities Enter Bull Market: 6 ETF Winners).

A muted dollar, as indicated by about 4.5% year-to-date losses in PowerShares DB US Dollar Bullish ETF UUP (as of June 16, 2016), has boosted the appeal for broad-based commodity investing and therefore the commodity-rich emerging markets have benefited. With the same investing sentiments likely to remain in place in the near term, emerging markets may offer some more capital gains too.

Why to Tap High Dividend Choices?

In the worst case scenario, even if EM equities’ ETFs end up recording capital losses, a high dividend payment would make up for that loss to some extent. We thus highlight a few EM dividend ETFs which could be in focus in the days to come (read: 4 Emerging Markets Bond ETFs on the Radar Now).

WisdomTree Emerging Markets Equity Income Fund (DEM)

With a total of 318 securities in its basket, the product is widely spread across individual securities with no firm accounting for more than 4.41% of the basket. The fund is heavy on financials, closely followed by energy, telecommunication services and materials. In terms of country allocations, Taiwan is at the top (23.48%), followed by China (14.05%), Russia (13.59%) and Brazil (9.06%).
The product appears rich with AUM of about $1.29 billion. The ETF charges 63 bps in fees per year from investors. The fund is up about 7.7% year to date (as of June 16, 2016) and has an annual dividend yield of 4.79% versus dividend yield of about 2.06% offered by SPDR S&P 500 ETF SPY.

SPDR S&P Emerging Markets Dividend ETF (EDIV)
EDIV tracks S&P Emerging Markets Dividend Opportunities Index, consisting of dividend paying securities of 123 companies in emerging markets. The ETF has so far attracted $257.5 million in assets.
The fund puts about one-third of total assets in top 10 firms, suggesting moderate concentration across each security. It is pretty spread well among various sectors with financials being the top sector having about 30% share. The top three countries are Taiwan (28.44%), South Africa (15.72%) and Brazil (22.66%).

The expense ratio for this fund is 0.49%. The fund has gained about 8.4% so far this year (as of June 16, 2016). However, it does pay out a solid yield of almost 4.84%, and it is up 8.4% so far this year (as of June 16, 2016).

WisdomTree Emerging Markets Small-Cap Dividend ETF DGS)

The $880-million fund gives exposure to small cap emerging market dividend paying companies. The product holds 591 stocks and none of the securities holds more than 1.15% of the assets. It is exposed to financials (20.57%) followed by IT (18.7%), consumer discretionary (16.6%) and industrials (14.2%).

Taiwan leads the country allocation with 27.57% weight, followed by China (13.99%) and Brazil (10.13%). The fund yields 3.07% annually (as of June 16, 2016) (see all broad emerging market ETF shere).  

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SPDR-SP 500 TR (SPY): ETF Research Reports
PWRSH-DB US$ BU (UUP): ETF Research Reports
WISTR-EM HI (DEM): ETF Research Reports
WISDMTR-E SC DV (DGS): ETF Research Reports
SPDR-SP EM DVD (EDIV): ETF Research Reports
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