DVYE - DVYE: More Risky Than It Seems Uncertain Dividend Trends

2023-12-05 23:49:44 ET

Summary

• Russia's invasion of Ukraine caused volatility in emerging markets and hurt ETFs with exposure to Russian stocks early last year.
• iShares Emerging Markets Dividend ETF features less volatility today compared to then, but I still see risks given its current composition.
• DVYE has high exposure to cyclical sectors and troubled countries, making it a risky bet on economic growth in emerging markets.

Russia's invasion of Ukraine resulted in cascading volatility across emerging markets and portfolio management strategies last year. Many Russia-domiciled companies were marked to zero in terms of equity value, hurting ETFs with significant exposure to said firms. One such fund was the iShares Emerging Markets Dividend ETF (DVYE). Morningstar noted , back in early 2022, that 16% of its allocation was in Russian stocks, which led to steep underperformance in the first quarter of that year. Know what you own and why you own it, as Peter Lynch would say.

I have a hold rating on DVYE. There's clearly geopolitical risk with the fund, even with no Russia exposure today.

DVYE's Sharp Early-2022 Underperformance: Blame It On Russia

According to the issuer , DVYE seeks to track the Dow Jones Emerging Markets Select Dividend Index, offering investors access to a portfolio of high-yielding equities across EM nations. The portfolio typically holds 100 stocks across sectors and styles, and the ETF can be used to form a high-income portfolio strategy. Its annual expense ratio is moderate at 0.49%.

DVYE is a somewhat small fund with just $647 million in assets under management as of December 4, 2023. What stands out is undoubtedly its high 9.3% trailing 12-month dividend yield . Unfortunately, that payout amount can be volatile, and when scanning its dividend growth history, there are ebbs in the distribution - 2021 was the highest annual dividend total at $2.81 while 2022 featured a dip to $2.39.

I encourage prospective investors to investigate other funds with a strong track record of increasing dividends. Still, DVYE sports an A- Dividend ETF Grade by Seeking Alpha and it's actually a rather low-risk fund when analyzing recent historical volatility metrics. Watch out for liquidity issues at times, though, as I noticed that the ETF's 30-day median bid/ask spread is high at 12 basis points, so using limit order when trading is prudent. Average daily trading volume is under 100k shares, too.

Digging into the portfolio, the 1-star, Neutral-rated fund by Morningstar reveals high exposure to value stocks. There are virtually no Growth positions, while more than half of the allocation is considered small or mid-cap in size. Thus, during periods of perceived economic weakness, DVYE could get hit harder than more defensive portfolios. The upside is that its price-to-earnings ratio is extremely low, near 6.5x (iShares lists it under 6x). The fund is also cheap across other valuation metrics (see below), though long-term earnings growth is not particularly impressive at 6.1%.

DVYE: Portfolio & Factor Profiles

What can make the ETF risky during rocky stretches is that there's a high percentage of assets in cyclical sectors like Materials, Financials, and Energy. So, I see it as an active bet on a pickup in economic growth prospects across EMs. There is the added risk that high exposure to troubled countries such as Brazil, China, and Taiwan could be at risk of geopolitical turmoil. Other variables impacting the portfolio are global interest rates and changes in the US Dollar Index.

DVYE: Holdings & Dividend Information

Seasonally, DVYE has historically rallied from mid-December through mid-February, often bucking the broader market trend early in the new year, according to data from Equity Clock . Since its early 2012 inception, volatility has occasionally struck from around Valentine's Day through the end of Q1 while the broader total return performance has been lackluster.

DVYE: Eyeing Year-End, Early 2024 Strength

The Technical Take

DVYE has been a serial underperforming fund in the last decade. Notice in the 3-year zoom below that shares have been trending higher since a low was notched in September 2022. A series of higher lows and higher highs has been welcomed by holders of the ETF, but DVYE has fallen short of the return on the broader Emerging Markets ETF as well as the S&P 500. Making me cautious today is that the fund recently approached the upper end of the trend channel, so I see downside risks to the uptrend support line, which is under both the 50-day and 200-day moving averages. Aiming to scoop up shares closer to $23 could be a more prudent play than buying today.

The good news for long-term investors in the ETF is that there is a high amount of volume by price in the $22 to $23 range, so pullbacks should be met with natural buying pressure in that zone. Moreover, there's not much in the way of overhead supply until about $31 - the range of lows from 2021 before the major early 2022 plunge.

Overall, with poor relative strength and a gradual uptrend in place, the chart is not all that positive, and near-term risks may be apparent given the test of resistance near $26.

DVYE: Modest Uptrend In Place, Shares Near Resistance

The Bottom Line

I have a hold rating on DVYE. The fund is a wager on a handful of risk-on sectors and long-term results have not been compelling.

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