As U.S. equity markets struggle, a clarion call has gone out to focus on dividend paying stocks. Bill Gross, co-chairman of PIMCO and the manager of the worlds largest bond fund, recently declared the “cult of equity” to be dead. But is this also true for emerging markets?
He also stated that expectations for future equity returns to match historically high norms were misguided. Not alone in this concern, many pundits and investors agree and are focusing on dividends to make up for some of the lost total return due to sub-par growth.
Those who focus on emerging markets are not as concerned as investors in U.S. stocks and funds may be. The long term outlook for frontier and emerging markets suggests high returns over the long haul should still be expected. But the focus on dividend paying stocks for domestic investors compelled me to review ETFs that focus on dividend paying companies in emerging markets.
There are more than a few funds in this space so I won’t review them all. Some actually overlap developed and emerging markets like the WisdomTree Dividend Index of Europe, Far East Asia and Australasia Equity Income Fund (DTH, quote). One of the supposedly dividend oriented funds is not even yielding as much as the most commonly traded broad-based emerging markets index ETF.
One company focused on dividend focused ETFs since its inception is WisdomTree, with four ETFs specifically designed for emerging markets investors. The first two are the WisdomTree Emerging Market Small Cap Dividend (DGS, quote) 3.25% and the WisdomTree Emerging Market High Equity Income (DEM, quote), 3.9%.
DEM has more than three quarters of its portfolio in five emerging markets countries as follows:
1. Taiwan 20.47%
2. China 14.18%
3. Brazil 14.08%
4. Russia 13.87%
5. South Africa 8.24%
DGS, the small cap fund, also has Taiwan as its top holding, but the rest is a bit different, as follows:
1. Taiwan 23.79%
2. South Korea 9.98%
3. Malaysia 9.89%
4. Thailand 9.34%
5. South Africa 8.36%
6. Brazil 7.38%
7. Turkey 5.54%
8. China 4.68%
9. Chile 4.59%
10. Indonesia 4.41%
This gives the impression the company is really thinking about what it is doing. Not only do we get market capitalization diversification but we truly get country diversification as well. The dividend yield on DGS is 3.25%. This is good in comparison to DEM, the “High Equity Income” fund, which has a yield of 3.9%. Trading volume in these two funds is pretty good for specialty emerging markets funds; more than 100,000 per day for DGS and nearly 700,000 per day for DEM. There is correlation with the iShares MSCI Emerging Markets Index ETF (EEM, quote) and the yields are not terrible superior either (EEM’s is 2.32%). But given the different allocations these two may distinguish themselves over time.
The two more targeted funds on the WisdomTree emerging markets roster are the WisdomTree Middle East Dividend Fund (GULF, quote) and the WisdomTree India Earnings Fund (EPI, quote). As far as dividend yields go these funds are quite different. The current yield on GULF is a very attractive 7.18% while EPI is yielding exactly 6% less with a current yield of 1.18%. But when we look at liquidity the situation is the opposite: EPI averages nearly three million shares per day while GULF averages a little more than four thousand.
As with DEM and DGS we see a high correlation with EEM. Which is why these funds, even more so than the broad based ETFs, should be purchased as long term holds. They will not likely be able to distinguish themselves during a period of global uncertainty. Everything tends to move up and down together. But GULF is attractive with its very high yield. Liquidity not withstanding, if you are to invest in something that will essentially move with the overall index, you want to get paid somehow and a dividend of 7.18% will do it. But without a significant yield advantage, and such high correlation to the overall market, these dividend ETFs may have to wait til there is a discernible total return benefit to owning them.