Emerging markets equities tumbled last year. As is often the case when that asset class struggles over an entire year, calls emerge late in that year that things will be better in the New Year and that developing economies look like value plays.
Based on traditional valuation metrics, such as price-to-book value (P/BV) and price-to-earnings (P/E), emerging markets stocks do look inexpensive. At the end of last year, the P/E, forward P/E and P/BV on the MSCI Emerging Markets Index was lower than those of the MSCI All-Country World Index and the MSCI World Index.
Among last year's drags on emerging markets stocks were the strong dollar and rising interest rates in the U.S. Those scenarios lead to higher external financing costs for governments that issued dollar-denominated debt when U.S. interest rates were low. As the Federal Reserve boosted interest rates four times last year, the dollar was one of the best-performing major currencies, punishing a slew of emerging markets assets along the way.
A new year could bring a more accommodative Fed. The CME Group 30-Day Fed Fund futures prices indicate a 98.90 percent chance the Fed's benchmark lending rate will remain in the 2.25 percent to 2.50 percent range following its January meeting and that same metric indicates little chance of the benchmark U.S. lending rate hitting 3 percent this year.
Obviously, 2019 is still in its nascent stages, but emerging markets assets are starting the year on a strong note. As of Wednesday, Jan. 9 th , the MSCI Emerging Markets Index gained 4.05 percent since the start of the year.
“Indonesia’s rupiah at one point registered its biggest gain since 2015, driving the MSCI EM Currency Index to its highest level since July, while a gauge of stocks clocked up its best two-day advance in two months,” according to Bloomberg. “Russian and Nigerian dollar bonds were among the biggest winners in the debt markets as oil rallied a sixth day.”Related: With Biotech, Cash is KingRelated: Positioning For A Biotechnology Rebound
Renewed strength in developing world equities to start 2019 highlights another important scenario: how various indexes weight emerging markets. The MSCI Emerging Markets Index is a cap-weighted benchmark and at the geographic level, tilts toward China. China accounts for over 30 percent of that index's weight, or more than the benchmark's combined weight to South Korea and Taiwan.
Conversely, the S-Network Emerging Sector Dividend Dogs Index equally weights sectors at 10 percent, individual securities at 2 percent and countries at 10 percent. Those traits can limit concentration risk, be it geographic, sector or individual security risk.
Regarding Indonesia, Southeast Asia's largest economy is seeing its equity markets sizzle to start 2019, but despite its heft in a fast-growing region, Indonesia accounts for just 2.35 percent of the MSCI Emerging Markets Index. That makes the country merely the 11th-largest geographic exposure in that index. At the end of the third quarter, the S-Network Emerging Sector Dividend Dogs Index devoted 10.43 percent to Indonesian equities.
Latin American stocks are also rallying to start 2019 as highlighted by a year-to-date gain of 8.49 percent for the S&P Latin America 40 Index. However, the MSCI index dedicates barely more than 13 percent of its geographic exposure to Latin American stocks, trailing the S-Network Emerging Sector Dividend Dogs Index's Latin American weight (as of Sept. 30, 2018) by nearly 500 basis points.
The ALPS Emerging Sector Dividend Dogs ETF ( EDOG ), a fund that displays value characteristics, tracks the S-Network Emerging Sector Dividend Dogs Index. As a yield-based strategy, EDOG trailing 12-month dividend yield of 4.85* percent far exceeds the 2.23 percent on the MSCI benchmark. The chart below confirms that since late 2017, EDOG has performed less poorly than the emerging markets benchmark.*EDOG had a 30 day SEC yield of 5.22% as of December 31, 2018.1Source: MSCI https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd56781112Source: Investing.com https://www.investing.com/central-banks/fed-rate-monitor3Source: Bloomberg Jan. 7, 2019 https://www.fin24.com/Markets/International-Markets/emerging-markets-get-that-goldilocks-feel-as-risk-buying-returns-20190107Important Disclosures & Disclosures This material must be accompanied or preceded by the Prospectus . Standardized performance for the ALPS Emerging Sector Dividend Dogs ETF (EDOG) can be found here . Current holdings for EDOG can be found here . ALPS Emerging Sector Dividend Dogs ETF Shares are not individually redeemable. Investors buy and sell shares of the ALPS Emerging Sector Dividend Dogs ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.The content and opinions expressed in this article are that of the author and not the views and opinions of ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.The Fund is subject to the additional risks associated with concentrating its investments in companies in the market sector.Diversification does not eliminate the risk of experiencing investment losses.The Fund’s investments in non-U.S. issuers may involve unique risks compared to investing in securities of U.S. issuers, including, among others, greater market volatility than U.S. securities and less complete financial information than for U.S. issuers. In addition, adverse political, economic or social developments could undermine the value of the Fund’s investments or prevent the Fund from realizing the full value of its investments. Financial reporting standards for companies based in foreign markets differ from those in the United States. Finally, the value of the currency of the country in which the Fund has invested could decline relative to the value of the U.S. dollar, which may affect the value of the investment to U.S. investors. An investor cannot invest directly in an index. Investing in emerging markets accentuates these risks.The S-Network® Emerging Sector Dividend Dogs Index (Ticker: EDOGX) is a portfolio of stocks derived from a universe of mainly large capitalization stocks domiciled in emerging markets. The EDOGX methodology selects the five stocks in each of the ten GICS sectors that make up the universe which offer the highest dividend yields as of the last trading day of November. The fifty stocks that are selected for inclusion in the portfolio are equally weighted.Basis point – one hundredth of one percent..MSCI Emerging Markets Index (MXEF) – is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries.MSCI EM Currency - The MSCI EM Currency Index sets the weights of each currency equal to the relevant country weight in the MSCI EM Index.MSCI World Index - The MSCI World Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1969. MXWO includes developed world markets, and does not include emerging markets. MXWD includes both emerging and developed markets.MSCI USA Index. - The MSCI USA Index is a free-float weighted equity index.ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Emerging Sector Dividend Dogs ETFDOG000840 12/31/2019