The SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV) gives investors the opportunity to add more dividend income to their portfolios while diversifying into emerging market stocks all in one ETF. EDIV also sports a very respectable 29.8% year-to-date total return so far in 2023, meaning that it warrants a closer look from investors.
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What is the EDIV ETF’s Strategy?
EDIV is a passively-managed ETF from State Street (NYSE:STT) that invests in the S&P Emerging Markets Dividend Opportunities Index. This index is composed of the 100 highest-yielding emerging markets common stocks that pass the fund’s stability and dividend growth screens. That last part is important because it helps weed out underperforming high-yield stocks that are likely to cut their dividends.
The fund has been around since 2011, and it is still relatively small, with $244.5 million in assets under management (AUM).
Why Should Investors Consider Emerging Markets?
There are several reasons that investing in emerging market stocks is an appealing option for investors. First and foremost, investing in emerging markets allows investors to diversify outside of their home markets and gain exposure to different companies and themes. According to Aniket Ullal, CFRA Research’s head of ETF data and analytics, emerging markets are now home to over 4.3 billion people and account for approximately half of the global GDP.
Secondly, investing in emerging markets gives investors the opportunity to tap into the high growth potential that many of these markets offer as their growing populations increase consumption and enter the global middle class. Ullal recently told The Wall Street Journal, “The biggest reason to invest in emerging-markets ETFs today is to gain exposure to high-growth markets with burgeoning middle-class consumers such as China, India, Mexico, Taiwan, South Korea and Vietnam.”
The International Monetary Fund (IMF) forecasts real GDP growth of 4.1% for emerging markets in 2024, easily outpacing the meager real GDP growth of just 1.4% that it forecasts for developed markets.
Lastly, while many of these stocks offer high growth potential, they often trade at discounts to U.S. stocks and other developed market stocks. For example, even after this year’s large gain, the price-to-earnings ratio for the index that makes up EDIV stands at just 8.4 as of September 11th. This is a significant discount to the S&P 500 (SPX), which has a price-to-earnings ratio of approximately 20.
An emerging market ETF like EDIV allows investors to own a large number of these stocks across a variety of markets, as you’ll see below.
Portfolio Composition
EDIV offers investors solid diversification. The ETF holds 103 stocks, and its top 10 holdings account for just 27.6% of the fund. This is because EDIV caps the weighting of individual stocks at 3%.
Additionally, the fund gives investors decent diversification across different countries and industries. EDIV caps the weighting of each sector and country within the fund at 25%. Below, you’ll find an overview of EDIV’s top 10 holdings.
The fund currently skews heavily towards Taiwan and China, which make up about 60% of the fund’s assets with weightings of 30.6% and 29.5%, respectively. The reason that they have exceeded the stated 25% cap is that they have outperformed, and the fund is yet to rebalance its holdings — the index rebalances on a semiannual basis. India comes in third place, with a 9.2% weighting. Other countries represented include Thailand, Qatar, Saudi Arabia, and Malaysia.
The sectors with the largest weightings are financials, information technology, and utilities, with weightings of 25.4%, 19.9%, and 15.9%, respectively.
How Has EDIV Performed in the Long Term?
As discussed above, EDIV is up big year-to-date, and this smaller ETF has quietly posted some solid returns in recent years. Over the past three years, EDIV has posted an impressive double-digit total return of 10.6% on an annualized basis (as of the end of August).
However, looking out over a longer time horizon, EDIV’s total annualized five-year return of 3.7% is less exciting, and its total annualized 10-year return of 1.7% is fairly underwhelming.
While EDIV’s 10-year performance hasn’t been much to write home about, it has picked up momentum in recent years, and if emerging markets continue to perform well going forward, it could be beneficial to have exposure to this part of the market through an ETF like EDIV.
Solid Dividend
EDIV currently sports a dividend yield of 3.9% on a trailing basis. The ETF pays a quarterly dividend and has been doing so for 11 years in a row. It has now grown its total annual payout for two consecutive years. While this may not be the highest dividend yield out there, it is significantly higher than the average yield for the S&P 500 and is part of a solid combination of dividend yield and total return in recent years.
High Expense Ratio
EDIV sports a fairly high expense ratio of 0.49%. This means that an investor allocating $10,000 towards EDIV will pay $49 in fees in year one. This might not sound like much, but these fees become more of a factor when they compound over time. For example, assuming that the fee remains at 0.49% and that the fund returns 5% per year, this same investor will pay $616 in fees over the course of 10 years.
In fairness to EDIV, ETFs focusing on international and emerging market stocks typically have higher expense ratios than index funds investing in U.S. stocks, so while it may be a bit high, its expense ratio is not out of line. The average expense ratio for emerging markets ETFs is 0.51%, according to Morningstar (NASDAQ:MORN).
The Takeaway
EDIV presents a compelling choice for investors seeking to bolster their portfolios with dividend income while also increasing their exposure to emerging market stocks. This comes at a time when emerging markets look set to offer more growth than developed markets.
On the plus side, the fund has a consistent history as a dividend payer and it offers investors decent diversification. It has posted double-digit annualized returns over the last few years and has been a great performer in 2023. On the negative side, the fund’s expense ratio is a bit high, and its performance over the long run has been underwhelming.
Still, EDIV seems to be turning a corner and picking up momentum, and its 3.9% dividend and strong performance over the last few years are appealing, making it an intriguing option for investors who want to add emerging markets exposure to their portfolios while being paid a solid dividend.
