This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

New Emerging-Markets Fund Goes Old School

NEW YORK (TheStreet) --The new year has started with a flurry of new exchange-traded funds, with 10 listing on Thursday alone, according to IndexUniverse

Van Eck Global, an investment-management firm, launched four funds this week, including the Market Vectors MSCI Emerging Markets Quality Dividend ETF (QDEM). Companies in QDEM have a yield that is 30% higher than the parent index, the MSCI Emerging Markets Index, which is tracked by the iShares MSCI Emerging Markets ETF (EEM).

Index constituents must have at least five years of dividend growth, and MSCI must believe that the dividends are sustainable. 

At the country level, QDEM is heaviest in China at 32%, South Africa 13%, Russia at 12% and Taiwan at 10%; there are more than 20 countries in all. Financials make up 30%, followed by energy at 25%, telecom at 15% and materials 10%.

Most of the larger holdings in the fund are familiar companies, including China Mobile (CHL) at 5.1% of the fund and Gazprom (OGZPY) at 5%. Also included in the top 10 are three of the big Chinese banks.

There are several issues to consider before buying the fund.

The country weighting is lopsided. For years, China has had tremendous promise, but the results have lagged. For the last five years, the iShares China Large Cap ETF (FXI) is up 43%, according to Google Finance, compared with 73% for EEM.

China faces some serious obstacles to outperformance, including a threat of an economic slowdown and potentially unsustainable debt burdens.

South Africa's economy is tied to commodities, and it will be difficult for South African stocks to do well if precious metals continue to decline.

The sector allocation makes sense, because although many emerging markets have immature equity markets, most of these countries do have a phone company, a big oil company and at least one large bank.

While the sector allocations aren't shocking, they represent old-school thinking of emerging-markets investing and likely carry some risk.

One of the biggest concerns with the China market is that the country's financial sector may experience something similar to what happened with U.S. banks in 2008 when bad loans and over-inflated real estate market led to many financial company failures. If that happens, then a fund with such a large exposure to the sector would likely falter.

QDEM is light on consumer discretionary at 3.1% and consumer staples at 2.9%. The significance is that the emerging-markets consumer sectors as measured by EG Shares Emerging Consumer ETF (ECON) have outperformed EEM over the last year.

Many analysts believe the future of emerging-markets investing will focus on consumer trends as a middle class with new-found discretionary income emerges. If that theme plays out, then QDEM could suffer for lack of this exposure.

Also part of the discretionary income theme is the tech sector. For example, in the last year, the Global X NASDAQ China Technology ETF (QQQC) has gone up 66%, but QDEM has only a 6% allocation to tech.

QDEM focuses on dividends and dividend history which accounts for certain sectors having low weightings. Although some sectors such as technology aren't where dividends have traditionally come from, investors need to consider future trends and how emerging markets are evolving.

Investors considering an allocation to QDEM as a core holding may also want to include a smaller exposure to a fund that will better capture consumer trends in emerging markets.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
QDEM $39.25 0.00%
AAPL $93.74 -1.15%
FB $117.58 0.73%
GOOG $693.01 0.29%
TSLA $240.76 -2.81%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs