DEM - EYLD: An Interesting 7% Yielding Emerging Market Shareholder Yield ETF
2023-11-27 12:02:12 ET
Summary
- High dividend ETFs are not performing well in the US, but are performing nicely in emerging markets.
- The Cambria Emerging Shareholder Yield ETF focuses on shareholder yield: it doesn’t look only at dividends, but also on buybacks, and net debt reduction.
- EYLD offers a strong combination of a high dividend yield (7%), a cheap valuation and a strong momentum.
High dividend ETFs aren’t the best performing investment theme. At least in the US. What about emerging market high div ETFs? They are doing fine! Our favorite is the Cambria Emerging Shareholder Yield ETF ( EYLD ).
Past performance
In a world where innovative AI tech companies are ruling the world, boring dividend ETFs are a bit out of favor.
Growth and quality stocks are sailing with the strongest tailwinds.
In the emerging markets high dividend stock ETFs (with the exception of the Global X SuperDividend Emerging Markets ETF ( SDEM )) are however performing nicely.
SPDR S&P Emerging Markets Dividend ETF ( EDIV ), is the star performer over the last 12 months thanks to its exposure to technology and semiconductor stocks. Following this nice performance, EDIV has however the lowest dividend yield (4.5%) of the five ETFs in Figure 3.
We are not surprised SDEM has the smallest AUM of the five emerging market dividend ETFs.
But, SDEM apart, there is something to say for all of these ETFs. The iShares Emerging Markets Dividend ETF ( DVYE ) has the highest yield (9.3%) and the WisdomTree Emerging Markets High Dividend ETF ( DEM ) has a the best long term performance. The Cambria Emerging Shareholder Yield ETF focuses not only on (shareholder) yield, but also on quality and value.
The three “oldest” emerging market dividend ETFs are EDIV, DYVE and DEM.
DEM is the only one of the three with a positive total return.
SDEM and EYLD are “younger” ETFs. SDEM has a negative return over the period since August 2016 (since the inception of EYLD), while EYLD on the other hand even outperforms DEM over that period.
EYLD also has a higher dividend yield (6.8%) than DEM (6%).
And finally EYLD is in a long term uptrend, while DEM is not.
Figure 6: Trends (Radar Insights)
The past decade US stocks outperformed international stocks, including those of the emerging markets. Figure 7 shows the US outperformance since the inception of EYLD in 2016.
SPDR S&P 500 Index ETF booked an annualized total return of 12.6%, while the (more volatile) iShares MSCI Emerging Markets ETF ( EEM ) only returned 3.4%.
Let’s now compare EYLD’s performance with a US dividend ETF (the iShares Select Dividend ETF ( DVY )).
EYLD is outperforming DVY! It’s slightly more volatile and as a result DVY has a slightly lower Sharpe ratio. But given the stark underperformance of emerging market stocks compared to US stocks, EYLD’s performance is quite impressive.
Bottom line: EYLD is our favorite emerging markets high dividend stock ETF.
Cambria Emerging Shareholder Yield ETF
Strong businesses have something in common: lots of (free) cash flow. Many investors love companies that return this cash flow to shareholders through dividend payments.
But dividends aren't the only way management can use its cash to create value for shareholders. Companies can also buy back stock or pay off debt. These two options, along with dividends, create the trio known as shareholder yield.
EYLD focuses on companies in emerging market countries that are returning cash to shareholders based on that shareholder yield. So, it doesn’t look only at dividends, but also on buybacks, and net debt reduction.
Like we said before EYLD focuses not only on (shareholder) yield, but also on quality and value.
EYLD uses a universe of publicly-listed emerging market stocks with market capitalization greater than $200m (that pass certain liquidity and price requirements). Cambria then selects the Top 20% of stocks based on shareholder yield (buybacks and dividends) while paying attention to a stock’s remaining debt pay down, as well as valuation metrics. Those metrics are:
- Price-to-Earnings Ratio,
- Price-to-Book Ratio,
- Price-to-Sales Ratio,
- Price-to-Cash Flow Ratio,
- Price-to-Free Cash Flow and
- Enterprise Value-to-EBITDA.
And EYLD manages indeed to select a portfolio of stocks with good value characteristics.
Figure 9: Valuation metrics (Cambria)
EYLD currently trades at a discount between 40 and 50% compared to the Morningstar Diversified Emerging Markets Category and the MSCI Emerging Markets Index.
The MSCI Emerging Markets Index itself is cheaper than the MSCI ACWI and World Index.
Figure 11: Valuation (MSCI)
EYLD also excludes stocks based on quality and leverage metrics. Finally, EYLD selects the 100 stocks that offer the best combination of shareholder yield characteristics and value metrics. The portfolio is rebalanced every quarter and at each rebalance the selected stocks are equally weighted.
EYLD scores indeed better on shareholder yield compared to the MSCI Emerging Markets Index.
And while China is the biggest country in the MSCI Emerging Markets Index, EYLD invests most in Taiwan.
EYLD is also overweight South Africa and South Korea and underweight India.
The biggest sectors in EYLD are Technology, Energy and Financials.
Figure 14: Sector weights ( Cambria)
Energy only accounts for 5% of the MSCI Emerging Markets Index.
Figure 15: Sector weights MSCI Emerging Markets Index (MSCI)
All-in-all EYLD has a portfolio that indeed scores well on yield, value and quality. But it has also a strong momentum. A nice combination indeed!
Figure 16: Factor profile (Morningstar)
Conclusion
Contrary to the US equity markets, high dividend ETFs perform very well in emerging markets. Our favorite ETF is the Cambria Emerging Shareholder Yield ETF. It offers a strong combination of a high dividend yield (7%), a cheap valuation and a strong momentum.
For further details see:
EYLD: An Interesting 7% Yielding Emerging Market Shareholder Yield ETF