Woof! New ETF Applies Dogs of Dow Theory to Emerging Markets
Like its predecessors the ALPS Sector Dividend Dogs ETF
(SDOG) and the ALPS International Sector Dividend Dogs ETF
(IDOG), EDOG is based on so-called Dogs of the Dow theory, which advises investors to buy the 10 Dow Jones Industrial Average stocks with the highest dividend yields.
EDOG will buy the five highest yielding emerging-market stocks in each of 10 major sectors and give each stock an equal weighting. That means a total of 50 stocks, each with a target weighting of 2%.
The new fund is diversified in its country exposure. EDOG invests in 16 countries. Seven of them have 10% weightings. These include Malaysia and Indonesia. They also include Thailand and Turkey, which have recently seen civil unrest, which could pose threats to companies based in these countries.
EDOG also has a 26% exposure to BRIC countries excluding India. These countries have generally lagged behind smaller emerging markets in the last few years after having performed so well in the previous decade.
Thus, from the top down, the country exposures could be problematic for EDOG.The fund is driven, however, by the bottom-up idea that companies that pay high dividends tend to be fundamentally healthy, that their dividends create demand for shares and that high yields can be an indication of depressed prices. This gives EDOG's strategy an opportunistic component. Among EDOG's 50 holdings, there are a few names that will be recognizable to investors, such as Russian natural gas giant Gazprom (OGZPY) and Levovo Group (LNVGY). Most names will be unfamiliar, however, which means that EDOG is not a different arrangement of the same stocks in benchmark funds such as the iShares MSCI Emerging Markets ETF (EEM). The performance of SDOG and IDOG relative to benchmarks argues in favor of using EDOG for the emerging-market equity component in an investor's portfolio.
In 2013 SDOG performed in line with the S&P 500 but it has outyielded the index by 140 basis points on a trailing basis. IDOG has only been trading since last July, but since then it has outperformed the iShares MSCI EAFE ETF (EFA) by 2.5% on a price basis and has outyielded it by 45 basis points.
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