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ETFs For Emerging Markets Dividend Growth

August 8, 2013 1:27 pm
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As U.S. stocks have been leaders this year, it is not surprising that ETF issuers have rolled out a steady stream of new dividend funds. The strategy makes sense as data indicate investors love income-oriented ETFs. As of the end of May, year-to-date inflows to dividend, preferred stock and REIT ETFs were near $25 billion.

Slumping currencies, spiking sovereign bond yields and a spate of anti-government protests are among the reasons emerging markets ETFs have been less than rewarding this year, but there are dividend opportunities in the emerging world, too. The WisdomTree Emerging Markets Equity Income Fund (NYSE: DEM) and the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSE: DGS) have $6.33 billion in combined assets. The SPDR S&P Emerging Markets Dividend ETF (NYSE: EDIV) and the iShares Emerging Markets Dividend ETF (NYSE: DVYE) have almost $700 million in combine assets.

And those are not even all of the emerging markets dividend ETFs available to investors today. In fact, a pair of new funds attempt to deliver one of the most important concepts in income investing: Dividend growth.

Related: Time to Shift to These Dividend ETFs.

The two ETFs are the newly minted EGShares Emerging Markets Dividend Growth ETF (NYSE: EMDG) and the even newer WisdomTree Emerging Markets Dividend Growth Fund (NYSE: DGRE). DGRE is just a week old. The EGShares offering debuted in early July. There are significant differences between the two funds that dividend growth investors should consider before jumping in.

EM Dividends Do Grow
Emerging markets do not yet have dividend growth track records that are on par with the U.S. Then again, few developed markets do, either. Still, dividends, as they are with U.S. equities, an integral part of the total return equation with developing world stocks. Over the past three years, DEM has outperformed rival diversified emerging markets ETFs, proving the fund’s status as a dedicated dividend play has rewarded investors.

Vital to the emerging markets dividend ETF selection process is country allocation. Put simply, some developing markets, such as a Taiwan, have decent dividend reputations. Some, such as South Korea, are dividend disappointments. While most of the ETFs tracking China and Russia have not generated positive returns this year, it should be noted the two are asserting some dominance when it comes to developing world dividends.

Parsing through the WisdomTree Emerging Markets Dividend Index, DEM’s underlying index, investors will find China is now the largest dividend payer in dollar terms at almost $27 billion while Russia offered the most robust dividend growth, according to WisdomTree data.

Of the new guard of emerging markets dividend funds, the EGShares Emerging Markets Dividend Growth features a 19.5 percent weight to China and a 7.3 percent weight to Russia. The WisdomTree Emerging Markets Dividend Growth Fund has combined weight of about 18 percent to both countries.

EMDG does have a combined 37.2 percent weight to financials and energy names, weightings that are par with the MSCI Emerging Markets Index, but the new ETFs trims some beta with a combined 35.5 weight to consumer stocks, utilities and telecom names. As for the WisdomTree Emerging Markets Dividend Growth Index (WTEMDG), DGRE’s underlying index, that index ensures DGRE is noticeably than its cousin DEM and that the new ETF has ample exposure to defensive sectors.

“The common constituents represent only 17% of the weight of WTEMHY, which means that most of WTEMDG’s stocks are additive and new compared to 83% of WTEMHY,” said WisdomTree Research Director Jeremy Schwartz in a note. “The common holdings represent 33% of WTEMDG, meaning two-thirds of its weight is not in WTEMHY and would be completely additive exposure.”

WTEMHY is the ticker for DEM’s underlying index. Financial services and energy names combine for 21 percent of DGRE’s weight, but staples and telecom combine for over 38 percent.

A point in DGRE’s favor is that the ETF “gives more weight to Mexico, Indonesia and Thailand (“MIT”) than it does to Brazil, Russia, India and China (BRIC). By contrast, the MSCI Emerging Markets Index gives almost four times more weight to BRIC countries than to MIT,” said Schwartz.

The EGShares offering features a combined 23.3 percent weight to Indonesia, Mexico and Thailand and a 46.6 percent weight to BRIC.

One Issue to Consider
If there is one country that is an obvious source of concern for both DGRE and EMDG it is Brazil. Earlier this week, it was reported that Markit Economics expects Brazilian dividends in local currency terms to slide eight percent this year. The research firm cited Petrobras (NYSE: PBR) and Vale (NYSE: VALE) as primary culprits along with Brazilian utilities.

DGRE and EMDG have weights to Brazil of 14.4 and 15.8 percent, respectively. Markit was more enthusiastic about the outlook for Brazilian bank dividends and that is good news for EMDG, which derives most of its Brazil weight from banks. Petrobras and Vale are also excluded from DGRE’s lineup. DGRE charges 0.63 percent per year and EMDG charges 0.85 percent.

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