EMDG: Dividend Growth Meets Emerging Markets

by on August 20, 2013 | ETFs Mentioned:

Exchange-traded funds have become a staple in numerous portfolios as investors of all walks have embraced these financial instruments for their ease-of-use and unparalleled reach to virtually any asset class around the globe. Emerging market funds in particular have been gaining popularity as investors at home have been scouring the international landscape for more attractive growth opportunities. Robert Holderith, founder and President of Emerging Global Advisors, recently took time to discuss the Emerging Markets Dividend Growth ETF (EMDG); a compelling option for anyone looking to beef up their portfolio’s current income without sacrificing the potential to generate lucrative capital gains [see 101 High Yielding ETFs For Every Dividend Investor].

ETF Database (ETFdb): What was the inspiration behind creating EMDG?

Robert Holderith (RH): Dividend growth is a popular and important investment theme among U.S. investors domestically – so much so that there are established dividend growth “brands” such as Dividend AchieversTM and Dividend Aristocrats®. Dividend growth has been used as a measure of quality; domestic and emerging-market-based companies that have consistently increased their dividend demonstrate strong underlying fundamentals. However, there had previously been no way for U.S. investors to apply a dividend growth strategy within emerging markets.

As many EM companies have grown and matured, more of them have initiated or increased dividend payouts, distributing a greater proportion of their profits to shareholders. EM-headquartered companies have also grown revenues more rapidly than their developed-market counterparts, both at home and abroad, and the increased profitability of EM companies has led to strong dividend and earnings growth (see graphic below).


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With these factors in mind, we created EMDG as a tool for U.S. investors to apply their dividend growth strategy within emerging markets.

ETFdb: What is the methodology behind the fund’s benchmark?

RH: EMDG tracks the FTSE Emerging All Cap ex Taiwan Diversified Capped Dividend Growth 50 Index, which measures the stock performance of the top 50 EM companies by market cap, whose 5-year dividend payout growth is faster than the average dividend payout growth in the FTSE All Cap Emerging ex- Taiwan Universe:

  • Dividend Quality
    • Dividends paid each of the past 5 years
    • Minimum trailing 1-year dividend yield: >1/2 trailing dividend yield of parent index
    • Minimum trailing 5-year dividend payout CAGR: 6.0%
  • Diversification
    • Positions are capped at 2.5%
    • Sector and country allocation are capped at 20.0%
  • Liquidity
    • Minimum float-adjusted market cap in the top 95th percentile of the index universe
    • Minimum trailing three month average daily traded value: $500,000
  • Index inception: June 27, 2013 • Reconstituted annually in March; weights are rebalanced quarterly

ETFdb: Considering that the Dividend ETF space has become fairly crowded, how does EMDG separate itself from the pack? What are some noteworthy features and differences?

RH: While there are many ETFs out there targeting the dividend theme, EMDG is the industry’s first EM ETF focused on dividend growth. Screening for stocks that have consistently increased their dividend through an entire business cycle has been a reliable way to identify quality companies, and research has shown that dividend growth ­rather than dividend yield is what tends to drive outperformance in emerging markets. As mentioned previously, the dividend growth opportunity within emerging markets is significant right now [see also Monthly Dividend ETFdb Portfolio].

While expected earnings growth can be one of several indicators of an increasing dividend, it’s no proxy. For example, a company could growth their earnings by 20% but only raise their payout by 10%, effectively cutting their dividend. Consensus estimates for earnings growth of emerging market companies is often overstated as well. This is why we think a company’s track record is a more reliable indicator of dividend growth.

ETFdb: Aside from generating income in the current low-rate environment, what else might investors find appealing about adding EMDG to their portfolios?

RH: Besides generating income, a couple key points about dividends is that they have been an important source of EM total return, contributing about one-third, and they have also sometimes been a factor in dampening portfolio volatility. EMDG is designed to provide these advantages for investors. Most importantly, dividend growth often signals quality—a strong balance sheet and track record of increasing earnings that can be paid out to shareholders.

Overall, EMDG can be viewed as a tool to help investors normalize their approach, applying similar strategies they use in developed markets within their EM portfolios through the dividend growth theme.

Bottom Line: EMDG warrants a closer look from anyone looking to utilize a dividend-growth strategy in overseas developing markets; this ETF focus on generating meaningful income in the current low-yield environment without sacrificing the potential to rake in stellar capital gains over the long-haul.

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Disclosure: No positions at time of writing.