Score High Yield Plus Low Volatility With Emerging Markets ETFs

Includes: EEM, EMDG, HILO
by: Dividends & Income Daily

It seems like emerging markets may be coming back in favor…

The media pendulum is swinging back to bullish sentiments, and pundits are once again advocating that investors should get back into emerging markets.

On the face of it, this seems logical. As the global economy recovers - and as stock market indices in the United States keep rising - emerging markets should follow suit.

So given this upswing, plus the scarcity of yield, it's not terribly surprising to find that a company exclusively focused on emerging markets has thrown a pair of dividend ETFs into the fray.

Let's check out two of EGShares' new emerging market ETFs…

Finding Safe Yields Abroad

EGShares is a relatively young company, and not quite a household name.

However, as its roster of ETFs expands and it attracts more attention, that might change.

In fact, the lineup is already jam-packed. With the inclusion of these new ETFs, EGShares can boast a list of 14 in total, all focused on emerging markets.

But of specific interest to dividend investors are the company's newest, income-oriented offerings. Namely, EGShares Emerging Markets Dividend Growth ETF (NYSEARCA:EMDG) and EGShares Low Volatility Emerging Markets Dividend ETF (NYSEARCA:HILO).

Both generate dividends, but differ in focus.

EMDG shoots specifically for dividend growth, by tracking the FTSE Emerging All Cap ex-Taiwan Diversified Capped Dividend Growth 50 Index.

HILO, on the other hand, tracks the Indxx Low Volatility Emerging Markets Dividend Index, which is designed to snag bigger yields with lower volatility than the MSCI Emerging Market Index.

In short, the choice between the two boils down to dividend growth versus lower volatility.

Nevertheless, there are a few additional differences that need to be pointed out…

  • Markets: In HILO, the top three countries represented are Turkey, Mexico and Malaysia, while in EMDG, the top three are China, South Africa and Brazil.
  • Sectors: There are notable differences in the sector allocation, too. HILO's number one sector is consumer goods. EMDG zeroes in on financials.
  • Exposure: While HILO has exposure to both healthcare and technology, EMDG doesn't. EMDG, on the other hand, has exposure to basic materials, which HILO lacks.
  • Holdings: The funds' top 10 stocks don't overlap at all, indicating that these funds could nicely complement each other.
  • Yield: HILO's current yield clocks in at 4.75% compared to EMDG's at 3.87%. (This is a little surprising, since HILO bills itself as the low-volatility fund, not the "higher yield" fund.)

About the last point: Remember, faster dividend growth doesn't necessarily mean higher dividend yields down the road (just higher yield on cost). And quite possibly HILO's advantage is that it seeks lower volatility, which translates to higher yield.

Think about it. In the United States, some of the higher-yielding stocks are those of more mature companies. And oftentimes more mature companies also have lower volatility.

So it makes sense that some of the emerging market companies included in the Indxx Low Volatility Emerging Markets Dividend Index - which HILO is benchmarked against - may be more mature, less volatile and higher yielding.

And so far so good, because since inception, HILO is up 4.3% and seems to be tracking the MSCI Emerging Markets Index very closely.

(As for EMDG, the results aren't yet in. It was just launched this month and lacks performance data.)

Bottom line: When compared with an ETF like the iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM), which has a yield of only 1.92%, HILO has an obvious upper hand.

And with a strategy oriented towards low volatility, HILO may be the path back into emerging markets for many investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.