Well-documented have been the struggles of some emerging
to start 2013. Among diversified funds, the two largest emerging
markets ETFs, the Vanguard FTSE Emerging Markets ETF (NYSE:
) and the iShares MSCI Emerging Markets Index Fund (NYSE:
), are each off nearly two percent year-to-date.
At the country-specific level, fears of tighter monetary
policy and a property bubble have hampered China ETFs. Slowing
economic growth has plagued Brazil while India ETFs have
have tumbled amid concerns the country will lose
its investment-grade credit rating
All of that is to say 2013, to this point, has been a
challenging year for emerging markets bulls. If there is good
news it is this: The aforementioned declines mean some emerging
markets ETFs are now sporting attractive valuations.
Newly released research from WisdomTree (NASDAQ:
) shows that while valuations may be compelling in the emerging
markets universe, investors should also pay attention to trailing
12-month dividend yield.
WisdomTree Research Director Jeremy Schwartz split the 24-year
history of the MSCI Emerging Markets Index, the index EEM tracks,
into high dividend years and low dividend years. High dividend
years are those that start with a trailing 12-month dividend
yield above the MSCI Emerging Markets Index median of 2.25
according to the research note
"Higher trailing 12-month dividend yields indicate that a
greater amount of aggregate dividends has been generated over the
past 12 months relative to the current share price, while lower
trailing 12-month dividend yields indicate the opposite," said
Schwartz notes that following high dividend years, the MSCI
Emerging Markets Index returned an average of 33.03 percent
compared to its average 24-year return of 17.47 percent.
EEM currently has a P/E ratio of 18.18 and a 30-day SEC yield
of 2.07 percent,
according to iShares data
. Investors looking for a more deeply discounted valuation with a
higher yield do have options among diversified emerging markets
ETFs, including the WisdomTree Emerging Markets Equity Income
DEM, which has almost $5.4 billion in assets under management,
tracks the WisdomTree Emerging Markets Equity Income Index. That
index had a P/E ratio of just 10.8 at the end of last year.
Additionally, that index has been about 500 basis less volatile
than its MSCI equivalent since inception,
according to WisdomTree data
DEM tracks the performance of the highest yielding stocks
selected from its index, usually those in the top 30 percent by
yield. That leads to some different country exposures than what
EEM or VWO investors may be accustomed to. While DEM is heavy on
the usual emerging markets suspects such as China, Taiwan and
Brazil, the ETF also features an almost 13 percent allocation to
Russia. That higher exposure to Russia has recently sparked some
concern that DEM may become more volatile than its rivals.
However, Russian firms are highly profitable relative to other
developing markets and the government there has moved to force
more of the state-owned companies to pay higher dividends. Not to
mention, Russian equities
have a history of trading at a discount to the
broader emerging markets universe
. The iShares MSCI Russia Capped Index Fund (NYSE:
) currently has a P/E
of just over 10
Bottom line: If past performance is any indicator, investors
will want some emerging markets exposure coming off a high
dividend year, as Schwartz notes.
"Four of the five best yearly return periods for the MSCI
Emerging Markets Index followed trailing 12-month dividend yields
that ranked among the five highest of all 24 calendar year
returns. Notably, at the 2008 year-end, the dividend yield on the
MSCI Emerging Markets Index was 4.75% (the highest value) and the
12-month forward return of the index was 79.02% (the highest
12-month forward return)," he said.
For more on ETFs, click
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