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A New Avenue To Emerging Markets Dividends

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October 30, 2017 10:26 am
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A New Avenue To Emerging Markets Dividends

Emerging markets stocks and the relevant exchange-traded funds are rallying in a big way this year, but investors should not forget about the income opportunities available with this asset class. A new ETF serves as a reminder regarding the potential potency of emerging markets dividend payers.

The VictoryShares Emerging Market High Div Volatility Weighted ETF (NASDAQ:CEY) debuted last week. CEY tracks the CEMP Emerging Market High Dividend 100 Volatility Weighted Index, a benchmark that eschews weighting stocks by market capitalization, the most common weighting methodology seen in emerging markets funds.

CEY's underlying index “combines fundamental criteria and volatility weighting in an effort to outperform traditional cap-weighted indexing strategies,” according to Cleveland-based Victory Capital. “Rather than weighting stocks by size, which results in concentration in the largest companies in the index, the CEMP methodology weights stocks based on volatility (standard deviation over the past 180 trading days). The goal is to offer investors a more balanced approach to achieving broad market exposure. To be included in the index, a company must have been profitable over the past four quarters.” 

Geographic Look

CEY's focus on lower volatility gives the new ETF a significantly different than the MSCI Emerging Markets Index. For example, Chinese stocks account for 15.4 percent of CEY's weight compared to 29.5 percent in the MSCI benchmark.

CEY is also overweight India by almost 300 basis points relative to the MSCI Emerging Markets Index. The new ETF is underweight Brazil and Russia, as just two examples, which makes sense because those are two of the most volatile developing markets. Brazil and Russia combine for just 5.6 percent of CEY's lineup.

CEY is also significantly underweight South Korea at almost 8 percent compared to 15 percent in the MSCI index. That is interesting because South Korea is, historically speaking, one of the least volatile emerging markets.

An Ideal Income Idea

““Investors seeking income now have the option to further diversify their portfolios with dividend-yielding emerging market stocks,” said Victory Shares president Mannik Dhillon. “With many emerging market companies currently out-yielding their U.S. counterparts, we believe it’s an appropriate time to consider a risk conscious, tax efficient approach to investing in high income-producing emerging market equities.”

CEY has a dividend yield of 2.92 percent compared to 1.32 percent on the MSCI Emerging Markets Index. The new VictoryShares ETF charges 0.5 percent per year, or $50 on a $10,000 investment.

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