EDIV - EDIV: China And Taiwan Focussed Fund Is Generating Decent Yield And Total Returns

2023-07-25 12:23:17 ET

Summary

• Over the long run, EDIV has been able to generate a steady and decent yield between 3 and 6 percent and equally decent total returns of almost 9 percent.
• Almost 80 percent of EDIV’s assets are invested in the markets of Taiwan and China. These two markets became highly lucrative during the past 10 years.
• Majority of EDIV’s net assets are invested in high growth potential sectors of semiconductors, electronics manufacturing services and financial services.
• EDIV is highly concentrated in a region with significant geopolitical risks. Any conflict between China and Taiwan might be devastating for this EM fund.
• A 27 percent YTD price hike has made this fund worth watching. But this exceptional growth has erased possibilities of buying this fund at a discount.

~ by Snehasish Chaudhuri, MBA (Finance)

SPDR S&P Emerging Markets Dividend ETF (EDIV) has caught eyeballs with more than 27 percent price rise during less than 7 months of this year. It is an exchange traded fund that invests in stocks of companies operating primarily in semiconductors, electronics manufacturing services and banking sectors in China and Taiwan. The fund aims to invest in dividend paying stocks of companies. So far, EDIV has been able to generate a decent yield between 3 and 6 percent and equally decent total returns of almost 9 percent. Stocks included in EDIV's portfolio have an average PE of 8.94, which is quite low, and thus have the potential to generate extraordinary returns in case semiconductors and electronic manufacturing industries are able to reach their peak growth potential. The fund is currently trading almost at par with its net asset value.

Quarterly Pay-Out Along With A decent Yield and Equally Decent Total Return

SPDR S&P Emerging Markets Dividend ETF was formed on February 23, 2011 by State Street Global Advisors, Inc. The fund is managed by SSGA Funds Management, Inc. Since the very beginning, EDIV has been offering a quarterly pay-out on a consistent basis and generating a decent to strong yield within a range of 3 to 6 percent. Since 2013, annual average yield generated by this fund is 4.34 percent. Total return over the long run has also been decent. Annual average total return between 2016 and 2021 was 8.715 percent . The portfolio has an expense ratio of 0.49 percent, which is a bit high considering that it benchmarks an index of only 100 stocks, that is also in a highly focussed market. This resulted primarily due to a very high turnover ratio of 71 percent.

EDIV Bets on ICT and Financial Sectors of Chinese and Taiwanese Economies

SPDR S&P Emerging Markets Dividend ETF seeks to benchmark itself against the performance of the S&P Emerging Markets Dividend Opportunities Index, and uses representative sampling techniques in order to create its portfolio. The index measures the performance of 100 high-yielding emerging market stocks. However, rather considering EDIV as an emerging market fund, it's better to treat it as a fund focussed on Taiwanese and Chinese markets. Almost 80 percent of EDIV's assets are invested in these two markets. For obvious reasons, the fund includes a huge number of stocks belonging to semiconductors, electronics manufacturing services and banking sectors. I observed that more than 70 percent of EDIV's $205 million AUM is invested in two sectors - information and communication technology (ICT) and financial.

Stocks of all the six large Chinese banks namely Agricultural Bank of China Limited ( ACGBY ), Bank of China Limited ( BACHF ), Industrial and Commercial Bank of China Limited ( IDCBY ), China Construction Bank Corporation ( CICHY ), Bank of Communications Co., Ltd. ( BCMXY ), China CITIC Bank Corporation Limited ( CHCJY ); are included in EDIV's portfolio. Other major investments in the financial sector include Taiwanese insurer Fubon Financial Holding Co., Ltd. ( FUIZF ), Taiwanese investment banker Yuanta Financial Holding Co., Limited, Chinese investment banker CITIC Securities Company Limited ( CIIHF ) and Hong Kong based financial services company CITIC Limited ( CTPCF ).

EDIV is Banking on Semiconductor and Electronic Manufacturing Sectors of Taiwan

A fund focussed on the Taiwanese market will for obvious reason hold various stocks of companies engaged in the business of semiconductors and chips. ASE Technology Holding Co., Ltd. ( ASX ), LITE-ON Technology Corporation, King Yuan Electronics Co., Ltd., Powertech Technology Inc. ( PWOGF ), Elan Microelectronics Corporation, Synnex Technology International Corporation and Tripod Technology Corporation are some of DVYE's top investments. One important thing to note here is that SPDR S&P Emerging Markets Dividend ETF has not invested in Taiwanese large-cap semiconductor trio - MediaTek Inc., Taiwan Semiconductor Manufacturing Company Limited ( TSM ), and AUO Corporation ( AUOTY ). As EDIV is focussing primarily in the Taiwanese ICT sector, going forward, I'd like to see these 3 stocks included in its portfolio.

Electronics manufacturing services traditionally have been the backbone of the Taiwanese economy. Rightly so, SPDR S&P Emerging Markets Dividend ETF invested in a bunch of stocks like Quanta Computer Inc. ( QUCCF ), Wistron Corporation, Acer Incorporated ( ACEYY ), Compal Electronics Inc. ( CMPCY ), Inventec Corporation, PEGATRON Corp ( PGTRF ) and Chicony Electronics Co., Ltd. The list also includes Chinese integrated technology company Zhen Ding Technology Holding Limited. These 25 stocks together hold more than half of EDIV's portfolio. So, there is no doubt that this fund is betting on the economic growth of China and Taiwan, and is focussed on the future growth segments of these economies. Thus any type of geo-political tensions and conflict between these two neighbors will be a disaster for the future of this EM fund.

Investment Thesis

Almost 80 percent of EDIV's assets are invested in Taiwan and China. This is in sharp contrast to geographic allocation almost nine years back. At that point these two markets had a share of little over 30 percent of EDIV's entire portfolio. This just proves how attractive these two markets have become during the past 10 years. For obvious reasons, EDIV includes stocks belonging to semiconductors, electronics manufacturing services and banking sectors. Growth potential of these sectors and expected economic growth of Chinese and Taiwanese economies are beyond any doubt. However, the risk remains high, as the fund is highly concentrated in a region with significant economic and geo-political risks. Global economic weakness already had its impacts. But, the larger risk lies in a potential conflict between these two neighbors.

SPDR S&P Emerging Markets Dividend ETF has been able to deliver annualized yields in excess of 4 percent over the past 10 years. Over the long run, EDIV has been able to generate decent total returns of almost 9 percent. A 27 percent year-to-date price rise has surely made this fund worth watching. This growth is mainly a result of growing interest in Taiwan's semiconductor and electronics manufacturing services industries. Chinese banks are also performing quite well. These companies have huge growth potential and are also trading at a lower than expected PE. However, this exceptional price rise has erased all the possibilities of buying this fund at a discount. EDIV surely comes as a good option for income-seeking investors who want a stable return over the long run. But the risk associated with it, especially the risk of geo-political conflict, doesn't make me extremely optimistic about this fund.

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