Lost in Translation: Emerging-Markets Dividend ETFs
The screening processes for high-quality dividend payers may not be as effective in emerging markets.
The screening processes for high-quality dividend payers may not be as effective in emerging markets.
The Morningstar Minute is our quick take on investments, the market, economic indicators, and more. Join us every day for fresh insights from our analyst team.
Patty Oey: Most U.S.-equity dividend exchange-traded funds employ a number of rules to screen out distressed names. For example, there are some funds that screen for names that have consistently paid higher dividends over a certain period of time and there are other funds that will screen for companies with relatively better fundamentals. These ETFs tend to have pretty high-quality portfolios, and they're suitable for use as a core holding.
Turning to emerging markets, there is a relatively new fund; it's called Market Vectors MSCI Emerging Markets Quality Dividend, ticker QDEM. This fund is looking for dividend payers that are relatively high-quality; it tracks the MSCI Index. What it does is it looks for higher-yielding companies, and they have to pass through these screens. They have to have paid consistent dividends over the last five years and have relatively higher returns on equity, low debt/equity ratios, and low earnings variability.
After stocks pass these screens, they form the index, and the index weights everything by their market cap. This should result in slightly less turnover relative to a yield-weighted approach. Its largest allocations are China at 30%, South Africa at 15%, and Russia at 13%. Unfortunately, the Chinese and Russian holdings, the biggest ones are your usual suspects. They are the government-controlled large-cap Chinese banks and Russian energy companies, and these companies right now have a pretty murky medium-term outlook. As a result it's not surprising that they're trading at relatively high yields because their share prices are quite depressed.
South Africa on the other hand has a lot of high-quality companies, and a lot of these companies have exposure to their faster-growing neighbors on the African continent. The South African rand was really volatile last year, and things are settling down. But it does highlight a risk that this fund has not hedged its foreign-currency exposure. So when emerging-markets currencies are falling, it will not only impact the share price of the ETF but will also impact the dividends that are paid out because the dividends are paid out in U.S. dollars.
The takeaway here is that quality screens that work well with U.S. equities may not work that well in emerging markets.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.