There is a lot of short-term uncertainty regarding the crisis in Ukraine and its impact on emerging market economies. However, the current environment presents an opportunity for investors to reallocate to local markets at an opportune time from a valuation perspective.
“We believe emerging markets are well positioned to weather the current geopolitical and economic shocks since most emerging market central banks began to tighten monetary policy last year – well ahead of their developed market counterparts,” they said. said Wilm Vandenhoeck, senior portfolio manager at Invesco, and Meral Karasulu, director of fixed income research, written in a preview.
The resilience of the asset class was demonstrated by the outperformance of local emerging market bonds (excluding Russia) against the broader US stock market during the second half of February, when the conflict escalated. , according to Vandenhoeck and Karasulu.
A solid offering to consider adding exposure to is the ALPS Emerging Sector Dividend Dogs ETF (EDOG)which applies the Dow’s Dog Theory sector by sector, using the S-Network Emerging Markets Index as the starting universe of eligible securities.
The Dogs of the Dow theory posits that dividends are more or less constant when prices vary, and therefore stocks that have a high dividend yield but are trading at a depressed price are poised to appreciate, according to the ETF database.
The strategy offers high dividend exposure across all market sectors by selecting the five highest paying stocks in 10 of the 11 GICS sectors (excluding real estate). Additionally, country representation is capped at five eligible titles per country, according to ALPS.
The fund holds an equally-weighted basket of 50 large-cap emerging market stocks selected on the basis of high dividend yield, according to the ETF database. Equal weighting at the stock and sector level can provide diversification while avoiding sector bias.
EDOG’s underlying index, EDOGX, has a dividend yield of 7.75%, which far exceeds a comparable benchmark yield for the Morningstar Emerging Markets Index (MEMMN) of 2.88%, in late February, according to ALPS.
EDOG’s price-to-earnings ratio (P/E) declined in February to 7.56x from the prior month and remains at a significant discount to that of the Morningstar Emerging Markets Index P/E of 13 .53x, making now a good time to add exposure to the fund.
When looking to add exposure to emerging markets, other funds to consider include the BNY Mellon Emerging Markets Equity ETF (BKEM) and the Schwab Fundamental Emerging Markets Large Co. Index ETF (FNDE).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.