Finding Value And Dividends In Emerging Markets

Market observers frequently opine that international markets, including developing economies, are sporting more attractive equity valuations than major U.S. benchmarks, such as the S&P 500. The flip side of that argument is that, in emerging markets, value stocks have been laggards.

“In emerging markets, the cumulative return differential between growth and value in the last five years has been 3,032 basis point (bps),” said WisdomTree in a recent note. “The contrast with U.S. equity markets is starker. Whereas broad emerging markets returned 4.6 percent annually over the last five years and emerging value registered 1.7 percent gains, the S&P 500 chalked up 16.2 percent a year.³ These are 'bull market problems,' but they are still problems. Emerging market value stocks are clear laggards.”

Investors willing to bet on a renaissance for emerging markets value fare can get compensated for doing so with the WisdomTree Emerging Markets High Dividend Fund DEM and the WisdomTree Emerging Markets Dividend Fund DVEM. DVEM and DEM yield 3.89 percent and 5.24 percent, respectively, compared to just 2.43 percent on the MSCI Emerging Markets Index.

Legitimate Value

There is value and then are value traps, but data suggest the indexes DEM and DVEM are trading at levels that suggest credible value.

“In P/E terms, the WisdomTree Emerging Markets Dividend Index is trading for 11.5 times earnings, 24.7 percent lower than the MSCI EM Index,” said WisdomTree. “Its high-dividend counterpart, tracked by DEM, is valued at 10.4 times trailing earnings. For context, MSCI USA is at 21.7 times earnings.”

DEM allocates over 56 percent of its combined geographic weight to Taiwan, China and Russia while DVEM, the younger of the two ETFs, allocates about 52 percent of its geographic exposure to Taiwan, China and South Korea. DEM's country roster is 20 while DVEM features exposure to 19 developing economies.

'A Buffer'

DEM and DVEM are both outpacing the MSCI Emerging Markets Index year-to-date while offering investors compensation that's well in excess of international and domestic benchmarks.

“With these ETFs’ underlying Indexes offering dividend yields in the mid-3 percent and 5 percent area, investors also get a buffer over and above the 2.43 percent and 1.98 percent yields of the MSCI Emerging Markets Index and the S&P 500, respectively,” said WisdomTree.

Disclosure: The author owns shares of DEM.

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