We have gone through the emerging markets universe and looked at the ETF dividend offerings.
- WisdomTree Emerging Markets Equity Income ETF (NYSEARCA:DEM)
- SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV)
- iShares Emerging Markets Dividend ETF (NYSEARCA:DVYE)
- EGShares Low Volatility Emerging Markets Dividend ETF (NYSEARCA:HILO)
- EGShares Emerging Markets Dividend Growth ETF (NYSEARCA:EMDG)
- EGShares Emerging Markets Dividend High Income ETF (NYSEARCA:EMHD)
- WisdomTree Emerging Markets Dividend Growth ETF (NASDAQ:DGRE)
- WisdomTree Emerging Markets Small Cap Dividend ETF (NYSEARCA:DGS)
Of these funds, two are out of the running due to very low volume: EMDG and EMHD. Another EGShares fund, HILO, has a poor track record. HILO switched its index in 2014 after the prior index failed to deliver low volatility. For investors looking for low volatility, it's a fund worth keeping an eye on, but in terms of its track record, other emerging market dividend ETFs have lower volatility than the plain vanilla emerging market indexes.
Leaving out those funds, plus the small cap and dividend growth options, we're left with a core group of emerging market dividend ETFs: DEM, EDIV and DVYE. The performance chart below shows how they've done since the newest fund came to market, as well as iShares MSCI Emerging Markets (NYSEARCA:EEM):
All three funds are highly correlated with EEM and all three have under performed that index since at least 2012.
This second chart is a price ratio chart. It shows all three dividend ETFs vs. EEM; a rising line indicates the fund outperforming EEM.
Once again, it's clear all funds are pretty similar in how they behave relative to the standard emerging markets index. Compared to each other though, a price ratio chart shows DEM outperforming the two other funds. In red is DEM vs. DVYE, and in blue is DEM vs. EDIV. Additionally, there is the U.S. Dollar Index in green.
DEM had been benefiting from the stronger U.S. dollar, but this effect ended recently. Lately, DEM is under performing EDIV and DVYE due to its large weight in Russia.
Investors can't rely on country exposure to remain consistent in fundamentally weighted ETFs, but certain criteria may cause some countries to remain overweight through a rebalancing. Take DEM, which is heavily invested in Russia and China. The Russian exposure may come down in future if Russian energy firms cut their dividends. The large exposure to China is likely to stay though, since Chinese banks are still paying out a lot of cash dividends and may continue doing so even if they dilute their shareholders by raising more capital via the equity markets. DEM weights holdings by the cash dividends paid and as long as Chinese banks don't cut the total cash payouts, they'll likely stay in the fund barring a crisis in the banking system.
DVYE is overweight Taiwan, while EDIV offers the most diversified portfolio when it comes to country exposure.
When it comes to sector exposure, DVYE is the most diversified. EDIV has a large weight in financials, as does DEM, but many emerging market ETFs have similarly large financial sector weightings. In addition to a heavy weighting in financials, which comes via the Chinese holdings, DEM is also overweight energy, which comes from the Russia holdings.
When it comes to income, DVYE had a yield of 5.55 percent as of October 31. DEM's yield was 5.15 percent as of November 24. EDIV's yield was 5.23 percent as of November 21.
DVYE doesn't yet have a 3-year history, but EDIV is the most volatile of the group thanks to its standard deviation of 16.38, well ahead of DEM's standard deviation of 14.06.
The Best Emerging Market Dividend ETF
Taking everything into account, the best emerging market dividend ETF is the iShares Emerging Markets Dividend ETF. DVYE's portfolio offers good sector diversification and aside from the heavy weighting of Taiwan, country diversification is good too. Income is the highest of the bunch and fees are the lowest at 0.49 percent.
The WisdomTree Emerging Markets Equity Income ETF is heavily weighted in China, Russia, financials and energy, but this gives the fund a value tilt that may be attractive to value investors. Even accounting for the portfolio weightings, the fund is very close competition for DVYE and investors who don't want the large Taiwan exposure of DVYE can switch to DEM.
Best Emerging Market Dividend Growth ETF
DGRE has low volume, but it is ahead of EMDG on this score and will likely see volume and assets increase once the performance from emerging markets improves. The big question mark for the fund is whether it can grow payouts faster than the other dividend ETFs. At this point there isn't enough history to make a conclusive judgment.
Best Emerging Market Small Cap Dividend ETF
There isn't any competition for the WisdomTree Emerging Markets Small Cap Dividend ETF, but the fund deserves mention for the fact that it has outperformed other emerging market small cap ETFs. Aside from a heavy weighting in Taiwan that is a feature of some emerging market dividend ETFs (and its emerging market small cap competition), the fund is well diversified across countries and sectors. With nearly 600 holdings and the number one holding at 1.10 percent of assets, the fund is also well diversified across its holdings. Even if an investor isn't looking for a dividend ETF, DGS would be the best candidate for emerging market small cap exposure.
Emerging markets have been in a sideways trend since 2011. Emerging market ETFs have been in an uptrend since bottoming in 2011, making a series of higher lows, but they've failed to exceed their former highs, even adjusting for dividends. A Chinese bear market had weighed on the asset class in prior years, and now the drop in commodity prices has hit Brazil and Russian shares. With the U.S. dollar on the verge of a major bull market and commodities under pressure, the group faces stiff headwinds. On top of potentially weak performance, a stronger dollar will weigh on dividend payments as well.
Investors will see a hefty dividend payment from these ETFs, but growth may be elusive and payouts could drop if current trends in commodity prices and the U.S. dollar continue. For investors solely in search of income, emerging market dividend ETFs may not be the best choice. However, for those investors who have emerging market exposure or are looking to add it as part of a diversified portfolio and want additional income from these positions, there is no reason not to add higher income options given the solid choices available.
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