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A Toxic Brew for This EM ETF


It feels like only yesterday that the combination of low volatility, high dividend stocks in the wrapper of an emerging markets ETF would be alluring to investors. Well, it was not that long ago, but that combination is not attractive to investors at the moment.

In fact, the flight from low volatility stocks and ETFs coupled with broad-based weakness across the emerging markets arena is pressuring a plethora of ETFs. That list includes the EGShares Low Volatility Emerging Markets Dividend ETF (HILO) . [South Africa Drops on Falling Rand]

HILO debuted nearly two years ago as low-beta, high-dividend alternative to traditional emerging markets ETFs such as the iShares MSCI Emerging Markets Index Fund (EEM) . HILO tracks the “Indxx Low Volatility Emerging Markets Dividend Index, a dividend yield weighted stock market index developed to provide a greater dividend yield (high income) and lower relative volatility (low beta) than the MSCI Emerging Market Index,” according to EGShares.

To its credit, HILO does make good on its dividend promise. The ETF’s index yield is 4.75%, well above EEM’s trailing 12-month yield of 1.78%. HILO has also had its moments sun, including a nice rally from the fourth quarter of 2012 into the early part of the first quarter. The ETF also had a decent run off its February lows to its May peak. [ETF Spotlight: HILO]

Now, the ETF is struggling and only part of those struggles can be pinned on HILO’s low volatility component. Simply put, finding emerging markets that are attractive and look risk over the past several weeks has been a daunting task. The BRIC nations have been disappointing all year, but Asia’s former darlings such as the Philippines and Thailand have also been rejected by investors due to plunging currencies and rising U.S. interest rates, among other issues.

That is a long way of saying that HILO’s country allocations are hampering the ETF. HILO devotes 21.1% of its weight to South Africa, a country beset by high unemployment, labor strife and surging bond yields. Next up on HILO’s roster is a 17% weight to Turkey. Said another way, HILO can work and work well when investors are favoring non-BRIC emerging markets, but right now, 38% of the ETF’s country weight is being rejected by investors. The combined 23.6% weight to China, Thailand and India is not helping HILO’s cause, either.

The fund dropped below its 200-day moving average last week and may not find support until it hits the lows of November 2012. A move to those levels followed by consolidation and an improved sentiment toward emerging markets equities could make HILO a buy, but that also means the ETF may have a bit more downside ahead of it.

EGShares Low Volatility Emerging Markets Dividend ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.

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.