ETF Expert

State Street didn’t invent the concept of dividend-oriented exposure to emerging markets. The Matthews Fund family has been ultra-successful with its Matthews Asia Dividend Fund (MAPIX) for many years. What’s more, WisdomTree’s Emerging Market Equity Income ETF (DEM) tracks an emerging market dividend index and has been a mainstay since July of 2007.

With that said, MAPIX focuses exclusively on Asia, carries an annual expense ratio north of 1%, and is less “liquid” with end-of-the-day pricing. WisdomTree’s DEM is far more diversified across emerging markets, yet nearly 1/3 of the fund is concentrated in its top 10 holdings and the Current P/E may be regarded by some as a bit rich (12.3).

The question, then, is whether or not SPDR S&P Emerging Market Dividend ETF (EDIV) offers anything new? I believe that it does, but I also believe that it may not deviate all that much from DEM — an exchange-traded dividend investment that already has $1.2 billion in its coffers.

On the surface, EDIV is a little less costly to own (0.59% versus 0.63%). However, most ETF enthusiasts know about the problems that arise with thinly traded vehicles. Since EDIV is a newbie with much lower volume than DEM, it’s likely to cost more than DEM in the bid-ask spread.

EDIV also tracks an index with a lower P/E multiple of 11 and a P/B of 2.1; DEM’s P/B is approximately 2.3. The differences may be small, but I imagine the folks at State Street would argue that EDIV is… fundamentally speaking… a better bargain.

Both funds have 20% in Taiwan as well as 20% in Brazil; both rely heavily on telecom companies for the yield boost. And… both might be expected to distribute dividend income in the area of 5% annually.

It’s too early to determine whether EDIV will boast a low beta relative to the MSCI Emerging Market Index. However, DEM’s roughly 4/5 as volatile as the emerging market benchmark. With EDIV currently having more invested in the utilities sector than DEM, it may be safe to assume that EDIV will be about 4/5 as “risky” as a basket of developing world equities.

For now, investors looking to reduce emerging market stock risk (not exposure) might stick with WisdomTree’s Emerging Market Equity Income (DEM). SPDR S&P Emerging Market Dividend ETF(EDIV) may be too new to establish a compelling enough case for out-performance in this conceptual arena. Of course, you never can tell when a new ETF offering will catch a burst of IPO-like euphoria.

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