Did you know the Dubai stock market has been crashing?
The Dubai Financial Market General Index fell from a high near
5,400 on 5/6/14 to below 4,000 this past week.
It now sits near 4,200, down over 20% in under two months.
The selling in the Middle East has affected specific Middle
East focused ETFs like the iShares MSCI Qatar (NASDAQGIDS:QAT) and
the iShares MSCI UAE (NASDAQGIDS:UAE), but the WisdomTree Middle
East Dividend Fund (NASDAQGIDS:GULF), which holds almost 50% banks,
is down over 10% in price since May with more of its holdings
exposed to the Dubai selling.
The Dow Jones Middle East & Africa Index (DJI:^DWMFST) has
fared much better, weighted more heavily in Africa than the Middle
East, but not everything has escaped the damage.
Another ETF with supposed Middle East exposure is the SPDR
Emerging Middle East and Africa (NYSEARCA:GAF), however a look at
its prospectus reveals it holds zero exposure to the Middle East
and as a result its price has barely been affected by the Middle
East's price decline. GAF's exposure is extremely
concentrated, with 93% of its holdings from South Africa, which has
largely helped it avoid the ramifications of the selling
Yield Chasing = Bad
Even after falling 15%, GULF's dividend yield still remains
under 3%, a great example of how chasing yield in this low rate
environment can be extremely dangerous.
A yield of only 3% does very little to protect you when the
underlying asset falls such a large amount (in this case over 10%
thus far). This is one of the key differences between a bond
and a stock and why stock dividends should not be compared directly
to bond yields.
With a bond you are typically guaranteed a return of your
principal. A stock contains no such guarantee and GULF is a
If you bought GULF in April or May, your yield was less than
2.5%, but the current decline has wiped out over four years of
dividend gains, in only two months!
The reality of the situation only gets worse as one chases
yields closer and closer to a top in price. This point was a
topic discussed in our April 2014 Profit Strategy Newsletter
article entitled, 'The Most Crowded Trade Ever' when we focused on
the extremely low bond (and dividend) yields.
But in GULF's case a price decline of 10% isn't the end of the
What VIX is Saying: Chad Karnes on the Index
Price Rising but not Dividends = Even Worse
The chart below shows that even though GULF's price has been
rising the last three years, the amount of dividends paid out has
actually been falling.
In 2012 GULF paid $0.66 of annual dividends. In 2013 this
shrank to only $0.56 in annual dividends. After its recent
June distribution, it looks as if 2014 will only pay $0.54 of
dividends to holders (a yield at current prices of only 2.5%).
Even though price has been rising, the amount of dividends paid
have actually been declining, having a negative effect on
It Gets Worse
In 2012, when $0.66 of dividends was being paid, GULF could have
been bought for under $16 as shown by the chart's bottom section
and price history. This means investors in 2012 received a
minimum yield of 4% (at its low price point, yield was above
In 2013 GULF traded for an average of $18 but only had a yield
By May, at GULF's peak in price of $24, it yielded just 2.3%.
Now its price trades 15% below that level, but yield is still
This means it will take those investors who bought GULF because
of its 2.3% yield in May over six years now just to breakeven,
assuming price stays the same as it is today. If price falls
further, it will only increase that breakeven time.
Buying stocks, ETFs, bonds, or anything else solely based on
yield is not a viable strategy. The price paid must always be
a portion of your decision making process as return of capital is
As the GULF example shows, it may take you more than a few years
to recover your losses through dividends alone as price risk
out-trumps dividend yield.
In the ultra low yield environment we currently are in, this is
exacerbated and even more important of a concept as a 20% decline
in price takes much longer to recover from than a similar 20%
decline that occurs when interest and dividend yields are
If you are yield chasing, buyer beware, as a sizable price
decline can more than offset any expected gains in dividends
Profit Strategy Newsletter
follows the stock, bond, commodity, and currency markets to keep
our subscribers ahead of the markets. Right now there is an
extreme push for yield, but investors should not forget that one
sizable market correction can wipe out all those expected future
dividends. This has already occurred in Dubai already
negatively impacting Middle East ETFs. What market is
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