EDIV: SPDR S&P Emerging Markets Dividend ETF

EDIV: SPDR S&P Emerging Markets Dividend ETF

The SPDR S&;P Emerging Markets Dividend Fund (NYSEARCA: EDIV) tracks the S&;P Emerging Markets Dividend Opportunities Index on a yield-weighted basis. The concept behind EDIV is to focus away from market returns or potential capital gains and instead find big dividend payouts from new, potentially undervalued markets. EDIV is an exchange-traded fund (ETF) and is legally structured as an open-ended investment company.

Emerging market economies tend to grow at a much faster pace than developed countries. Businesses in these economies receive huge productivity boosts by incorporating capital and technology from the outside world; there are far fewer new opportunities for developed countries to jump on. This kind of growth can leave room for higher returns or, in the case of EDIV, possibly higher yields as well.

The underlying index is most heavily weighted towards Brazil, Taiwan, Hong Kong and Thailand; each represents between 12% and 19% of total assets. Other major countries include South Africa, Turkey, India, Poland, South Korea and Russia.

Financial stocks make up more than a quarter of all holdings. Fifteen percent of stocks belong to companies in the telecommunications services sector, with basic materials and utilities not far behind. Other sectors in the top 10 are industrials, technology, consumer cyclicals, energy and consumer non-cyclicals.

No single holding in the SPDR S&;P Emerging Markets Dividend Fund reaches 4% of total assets. Major positions in the ETF include Advanced Info Service Public Company Limited, SK Telecom Company, PTT Global Chemical Public Company Limited and Vodacom Group, Ltd.

Characteristics

State Street Global Advisors introduced the SPDR Emerging Markets Dividend ETF in February 2011. The fund is managed by Global Equity Beta Solutions and trades on the New York Stock Exchange Arca.

The SPDR S&;P Emerging Markets Dividend Fund is a relatively small ETF. Total assets under management (AUM) is less than $380 million. The fund also lacks substantial trading volume (less than 85,000), which can cause liquidity problems. This difficultly can be seen in bid-ask spreads of up to 0.15%.

The expense ratio for EDIV hovers around 50 basis points (bps), which is neither particularly expensive nor cheap for an ETF. On the yield side, EDIV often shows dividends of above 5%.

Suitability and Recommendations

All investments carry risk. ETFs are equity investments that trade just like stocks; shareholders could potentially lose all of their principal investment. Since EDIV tracks non-U.S. companies, investors are exposed to market risks, currency risks and emerging markets risk. Anyone holding or interested in this fund should monitor the development of major developing nations, such as Brazil, India and Taiwan.

While EDIV shows strong dividend performance, a closer look reveals that those numbers might not reflect strength. The fund historically underperforms when compared to its benchmark, and dropping share prices often create the illusion of dividend appreciation. It would be more accurate to say that dividends are only increasing relative to a falling share price.

EDIV is a little more volatile than the broader stock market. It carries a trailing three-year beta of 1.12 and a standard deviation above 15. The fund's alpha rating is a lagging -7.69, further emphasizing its struggle to keep up with the benchmark. EDIV also carries negative Sharpe and Sortino ratios.

The investment strategy for EDIV appears solid and, if it worked, could play well as a core holding in a long-term portfolio. Large-scale dividend reinvestment in a growing economy sounds like the perfect formula for sustained value. However, until such time as the fund's focus on yield over returns pays off, investors would probably be best limiting exposure to only a small satellite. This position could be increased if performance turns around.