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Has a New Era Dawned For EM Dividend ETFs?

Has a New Era Dawned For EM Dividend ETFs?

In keeping with one of 2012's most prevalent investing themes, August was a stellar month for dividends. Not in terms of gains by high-yield stocks, but in terms of dividends paid. A record $34 billion in dividends is expected to have been paid last month compared to the previous one-month record of $32.1 billion set in November 2011, Barron's reported.

It is not just the U.S. and other developed market firms that are rewarding shareholders. Emerging markets companies are starting to increase payouts to shareholders, too.

Citing a UBS report, the Financial Times reports the 300 largest non-financial firms in the MSCI Emerging Markets Index are expected to pay $52.2 billion in dividends this year, up from $48.9 billion last year. The MSCI Emerging Markets Index is the index tracked by the Vanguard MSCI Emerging Markets ETF (NYSE: VWO) and the iShares MSCI Emerging Markets Index Fund (NYSE: EEM).

ING IM recently said Western investors need to start taking notice of the emerging markets dividend story because dividend growth in the developing world is supported by low levels of corporate debt and high levels of profitability.

Increased shareholder payouts by emerging markets companies may leave investors pondering departure from run-of-the-mill ETFs such as EEM and VWO in favor of high-yielding fare. Of course, the question is what funds can serve as dividend alternatives to VWO and EEM, the two largest emerging markets ETFs by assets.

VWO yields almost 2.3 percent while EEM yields nearly 2.1 percent so finding adequate replacements for income investors should not be too hard. The WisdomTree Emerging Markets Equity Income Fund (NYSE: DEM) is one name that immediately jumps out as a high-yield replacement for EEM or VWO.

The issue here is not just DEM's distribution yield of 5.33 percent, which obviously dwarfs the yields on EEM and VWO. The big issue is the yield plus long-term performance. Over the past five years, DEM has simply dominated VWO when it comes to returns. It appears investors are taking notice of DEM's superiority. The ETF had $3 billion in assets under management in February. Today, that number is offer $4 billion.

DEM has a small-cap cousin in the form of the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSE: DGS). DGS, which has $986.3 billion in AUM, is the dominant force in terms of emerging markets small-cap dividend funds.

As is the case with many multi-country funds, DGS is heavily allocated to Taiwan and South Korea as the two countries combine for 34.5 percent of the ETF's weight. On the bright side, high-flying markets such as Malaysia, Thailand, Chile and Turkey combine for almost 30 percent of the fund's weight.

DGS is well-positioned to benefit from higher dividends in developing nations, this fund is not risk-free. The ETF is solidly in the green year-to-date, but investors have embraced U.S. small-caps more than emerging markets fare. DGS has a yield of almost 4.3 percent, but naysayers will notice that, excluding the dividend, DGS has lagged the iShares Russell 2000 Index Fund (NYSE: IWM) this year.

In terms of ETFs that are poised to benefit from higher EM dividends, the EGShares Low Volatility Emerging Markets Dividend ETF (NYSE: HILO) has standout potential. The reason for this is two-fold.

First, there is mounting evidence that state-run enterprises are going to increase dividends because the controlling governments want more cash, Investment Europe reports. HILO offers access to several state-run enterprises.

Second, HILO features a favorable country mix. As one example, Brazil is country where dividends are required by law for some firms. That country is the most prominent in HILO with a weight of 18.3 percent. Add to that, India and Russia are among two countries that are home state-controlled firms that are expected increase dividends. Those nations combine for 10 percent of HILO's weight.

Regarding ETFs with the right country mix for income investors, the newly minted iShares Emerging Markets Dividend Index Fund (NYSE: DVYE) is a credible option. The iShares Emerging Markets Dividend Index Fund debuted in February and has thus far attracted $30.7 million AUM, a fair though not awe-inspiring start.

DVYE has lost 6.3 percent since its debut, but the fund has gotten its act together in the past three months, jumping 7.5 percent. Taiwan, another country where dividends are required for many firms, and Brazil combine for 35 percent of DVYE's weight. South Africa, a decent dividend destination in its own right, represents 10.5 percent of DVYE's weight.

Investors that focus on DVYE's slack average daily volume of less than 7,100 shares will miss the most important attribute of this ETF: A 30-day SEC yield of almost 4.6 percent.

For more on emerging markets dividend ETFs, click here.


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