Established Companies or Emerging Growth for Outperforming ETFs?

Published Mon, 9 Dec 2013 11:00 CET

There is often confusion in the press relating to financial markets about whether exposure to established markets with strong track records or a foothold in emerging markets with strong growth prospects are the best way to maximise investor returns. ETFs provide a great way to gain either of these exposures without the need to examine individual companies, but which theme is more likely to deliver stronger dividend streams going forward?

This article examines two high dividend paying ETFs to highlight how different trends and themes such as market exposure, strategy and long term prospects can drive their valuations and yields higher or lower.

The Aristocrat Follower
The SPDR S&P Dividend ETF (SDY) is the most well known and obvious pick for any dividend paying ETF list. While the price of the ETF has inflated alongside the market, this recent run up is arguably well justified. The fund follows the high yielding Dividend Aristocrats Index, which is made up of a selection of companies that are narrowed down from over 1500 to a measly 60. The one salient feature that all of the remaining companies have is that they hold the distinction of having increased their dividends for at least a quarter of a century.

That means that buying this ETF exposes you to businesses that are strong enough financially to continually grow their profits and therefore payouts over an incredibly long-term horizon. The benefit to being exposed to a portfolio such as this is that it is the equivalent to buying a safe family car over an expensive sports car: you invest your money because you know you won't have to worry about it day to day and it won't need constant attention to do its job.

The exposure to mostly large cap stocks and bypassing speculative technology companies and other more inconsistent sectors has yielded impressive returns, typically outperforming the Standard & Poor's 500 by between 0.5% - 1.5% year on year, with a standout year coming in 2010 with a 16.4% total return, comfortably beating the index (before expenses of 0.35% were applied).

Betting on the Emerging Growth Engines
For those concerned that the U.S. stock market is a little overvalued, and therefore wanting to steer clear of options like the SDY, because of the effect that a higher valuation has to correspondingly lowering yield there are a wealth of other options. Of these, one that plays the longer-term theme of the emerging markets providing the impetus for the growth of the world economy is the WisdomTree Emerging Markets Equity Income Fund (DEM).

Investing in this ETF is a more contrarian approach than purchasing SDY units, as the fund has not appreciated in price as strongly as its counterpart. The reasons for this are numerous, but prominent among them is the slowing down of Chinese growth from double digit percentages to a more sedate range of 7%-9% annually. This has coincided with a serious weakness in the other member of the 1 billion population club, India, in terms of its currency and political gridlock.

However, the fund is well aware of these macroeconomic trends, and has a trimmed weighting to China of 18% which compares favourably to other globally exposed ETFs. It is also worth noting that the high single digit GDP growth of nations like China quadruple and sometimes even more greatly outpace the anaemic growth of western economies in Europe and North America over the same period. The fund also holds stocks in resilient economies like Brazil and Taiwan that have also weathered the financial storm of the last decade well based primarily on strong commodity and technology-focussed exports, respectively.

The fund is a good long-term play to gain exposure to around 300 companies leveraged to current global market themes and comfortably outpaces the benchmark MSCI Emerging Market Index with outperformance of up to 8% in the last five years. DEM also delivers a superior payout as a result of the manager, WisdomTree, preferring a fundamental weighting approach over a more vulnerable to negative performance index weighted or momentum determined portfolio, while fees are arguably justifiably higher than peers at 0.63%.

The two ETFs discussed above are both solid dividend payers with track records of outperforming their respective indexes over the long-term, however, they provide for different opinions on the future of the global economy in terms of where the stronger performance will be found: in established U.S exposed stocks, or from the growing and internationally diversified emerging markets. It depends on your outlook as an investor to determine which of these ETFs is more suited to inclusion in your portfolio.

ETF name ISIN Price TER YTD Dividend Freq Ex Div Date Dividend Yield
WisdomTree Emerging Markets Equity Inc Dividend WisdomTree Emerging Markets Equity Inc on Bloomberg WisdomTree Emerging Markets Equity Inc DEM DEM Dividend WisdomTree Emerging Markets Equity Inc on Reuters WisdomTree Emerging Markets Equity Inc ETF on Yahoo! Finance US97717W3152 43.54 USD 0.63 -3.05Quarterly06/25/20183.87
SPDR S&P Dividend Dividend SPDR S&P Dividend on Bloomberg SPDR S&P Dividend SDY SDY Dividend SPDR S&P Dividend on Reuters SPDR S&P Dividend ETF on Yahoo! Finance US78464A7634 97.2 USD 0.35 4.18Quarterly06/15/20182.59