Many investors aren’t familiar with the emerging markets income proposition, but if they desire equity and fixed income, developing economies offer ample allure.
As of May 30, the dividend yield on the MSCI Emerging Markets Index is 2.49%. Not jaw-dropping by any means, but still nearly 100 basis points ahead of the comparable metric on the S&P 500. The elevated income proposition doesn’t end there as emerging markets bond benchmarks typically sport yields well in excess of their domestically focused counterparts.
So at a time when many investors are revisiting emerging markets and the related exchange traded funds, the asset class offers surprising levels of income – both in high-yield and payout growth form. Moreover, adding dividends or fixed income to the emerging markets equation can damp some of the volatility associated with this often turbulent asset class.
With those factors in mind, here are some income-centric emerging markets ETFs to consider.
KraneShares S&P Pan Asia Dividend Aristocrats Index ETF (KDIV)
The KraneShares S&P Pan Asia Dividend Aristocrats Index ETF (KDIV) could be to the liking of a broad swath of dividend investors for multiple reasons. First, the ETF includes both developed and emerging markets equities. That can mute some of the volatility that comes with developing world equities.
Second, KDIV’s underlying benchmark – the S&P Pan Asia Dividend Aristocrats Index – is a dividend growth index, not a high-yield gauge. That implies a higher level of quality than investors find with traditional broad Asia-Pacific equity ETFs. Bottom line: There’s a lot to like with KDIV’s methodology.
“Companies must also have positive earnings and a dividend payout ratio between 0% and 100%,” according to S&P Dow Jones Indices. “To avoid dividend traps, stocks with an indicated annualized dividend (IAD) yield above 10% are excluded from the index. The S&P Dividend Aristocrats methodology provides a ballast for investors since the ability to consistently grow dividends every year through different economic environments can be an indication of financial strength and discipline.”
VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC)
With U.S. fixed income assets rebounding this year, investors can be forgiven if they’re glossing over funds such as the VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC). However, they may want to rethink that strategy because emerging markets bonds denominated in local currencies are easily outpacing Treasuries through the first five months of 2023.
Emerging markets bonds, both dollar-denominated and local currency, are typically viewed as significantly riskier than developed market counterparts. However, EMLC offers compensation for that perceived risk as highlighted by a 30-day SEC yield of 6.81%. That’s 285 basis points ahead of the same metric on the widely observed Bloomberg US Aggregate Bond Index.
Perhaps to the surprise of many market participants, EMLC proved durable amid banking system calamity earlier this year.
“Since March, investors have been reminded that financial sector stress is unique in its ability to impact broader markets, due to the risk of contagion, impact on the economy through credit availability, and potentially, the costs of a bailout,” according to VanEck research. “Such costs often historically have fallen on the public, and the impact to sovereign fiscal positions can be material. The failures of certain regional banks in the U.S., although they appear idiosyncratic and contained so far, have spooked domestic markets, but emerging markets (EM) have appeared insulated.”
WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)
The $2.68 billion WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) is almost 16 years old and remains the pioneer of the small-cap/emerging markets dividend marriage. It’s also an ETF to consider at a time when international small-cap stocks are outpacing their domestic rivals.
“The gap in performance between names with significant overseas exposure and those that do not has been significant at 540bps thus far this year and running close to the entire difference we saw in ’16,” according to Jefferies research. “Although we think this is where most investors have positioned themselves, and we tend to act against the grain, we still think this theme has legs.”
DGS sports a 30-day SEC yield of 5.12%. Alone, that’s impressive because it’s far beyond what’s found on domestic small-cap equity benchmarks. Making that the yield all the more impressive are the facts that DGS has lower valuations and higher concentration of profitable companies than competing domestic strategies.
Original Article: https://www.nasdaq.com/articles/top-emerging-markets-etfs-for-income
