Vladimir Zakharov
~ by Snehasish Chaudhuri, MBA (Finance)
iShares Emerging Markets Dividend ETF (NYSEARCA:DVYE) is an exchange traded fund (ETF) that invests in public equities of core sector firms in the emerging markets throughout the globe. The fund invests in dividend paying stocks of a broad range of established entities primarily in energy, utilities, and materials. These three sectors have been beneficiaries of the commodities boom witnessed post the covid-19 pandemic. The energy and utilities sector has also capitalized on Russia’s invasion of Ukraine. Increased demand after opening up the economies combined with a supply chain crisis created a commodity super cycle which led to growth of such companies, when the broader market failed to perform. However, the risk of a global recession threatens to derail this commodities boom. Prices of oil and gas are also expected to moderate with the risk of a global recession. All these macroeconomic uncertainties make DVYE an interesting fund to track.
iShares Emerging Markets Dividend ETF Targets the Core Sectors
iShares Emerging Markets Dividend ETF was launched by BlackRock, Inc. and is managed by BlackRock Fund Advisors. It seeks to track the investment results of Dow Jones Emerging Markets Select Dividend Index, by using the representative sampling technique. This index measures the performance of 100 established and strong dividend paying companies operating in the emerging markets throughout the globe. It has an expense Ratio 0.49 percent, and its portfolio has a very high turnover ratio of 66 percent. Average total return during the period of 2016 and 2021 was 11 percent. The fund is paying regular quarterly dividends for more than 10 years and has recorded an annual average yield of 6.5 percent over the past 5 years.
iShares Emerging Markets Dividend ETF has an asset under management (AUM) of $594.5 million, which it primarily invests in dividend paying stocks from high growth major emerging markets. What I like about this fund is that it targets the core sectors – materials, energy, utilities, and financials. Most emerging economies lack infrastructure, and so there is a sure-shot prospect of growth in those areas. Almost 65 percent of DVYE’s assets are invested in these sectors. Despite the fund investing heavily in India, Taiwan, China, and Malaysia, there is little emphasis on technology, communication, industrial and healthcare stocks – four sectors in which companies from those countries have been quite successful and are recognized as global brands.
iShares Emerging Markets Dividend ETF Has a Robust Diversified Portfolio
iShares Emerging Markets Dividend ETF in its investment objectives specifies that it aims to provide exposure to a broad range of established companies in emerging market economies and access to 100 dividend-paying emerging market stocks. Almost 90 percent of its assets are invested in eight countries – Brazil, India, Chile, South Africa, Thailand, China, Taiwan, and Malaysia. My regular readers might know that I consider India, China, Taiwan, Thailand, and Malaysia among the best emerging markets due to their large scale, high economic growth, investment grade rating of their sovereign bonds, and robust political systems. In addition, materials and utility-based companies from Brazil, Chile, and South Africa also become good investment options.
Brazil is the leading producer of iron ore, tin, and phosphate. Brazil also possesses large deposits of manganese, chromium, diamonds, copper, and bauxite. Chile is the largest producer of copper with 29 percent of global copper production. With a 22 percent share of global production, Chile is also the world’s second-largest producer of lithium. Chile is also the largest producer of some other materials like rhenium, iodine, sodium, and potassium nitrate. South Africa has the largest reserves of diamonds and gold. The country also contains reserves of iron ore, platinum, manganese, chromium, copper, uranium, silver, beryllium, and titanium. So, despite the sovereign bonds of these countries not having the best credit ratings, returns from investments in equities of core sector firms are almost a certainty.
Top 20 investments of iShares Emerging Markets Dividend ETF consists primarily of companies from Brazil, India, Chile and South Africa in those four core sectors – materials, energy, utilities, and financials. Coal India Limited (COALINDIA.NS), REC Limited (RECLTD.NS), Indian Oil Corporation Limited (IOC.NS), and Bharat Petroleum Corporation Limited (BPCL.NS) – all four are ‘Maharatna’ or ‘Navratna’ companies from India, implying these are some of the few Public Sector Units (PSU) considered to be crown jewels of the Indian government-run businesses. Exxaro Resources Limited (OTCPK:EXXAF), African Rainbow Minerals Limited (OTCPK:AFBOF) and Kumba Iron Ore Limited (OTCPK:KIROY) are premier South African materials and mining companies.
Investments in Chile are made in Colbún S.A. (COLBUN.SN), an utility supplier, Empresas CMPC S.A. (CMPC.SN), an energy producer, and CAP S.A. (CAP.SN), a mining company. Among the Brazilian mining companies, DVYE has put high bets on Metalurgica Gerdau S.A. (GOAU4.SA), Vale S.A. (VALE), Bradespar S.A. (BRAP4.SA) and Gerdau S.A. (GGBR4.SA). CPFL Energia S.A. (OTC:CPFEY), Cia de Transmissao de Energia Elétrica Paulista (TRPL4.SA) and Energy of Minas Gerais Co (CMIG4.SA) – are three Brazilian utilities companies that also feature within its top 20 investments. The fund also invested significant assets in energy supplier Unipar Carbocloro S.A.
How the Core Sectors of Emerging Markets Expected to Perform in Future
Oil and gas are the backbone of any economy since it is essential for most economic activities, ranging from industrial production to transportation to domestic use. Ensuring supply of fossil fuels, and construction of a solid supply chain structure are critical for economic growth, especially in emerging markets. Demand always exceeds supply in this sector. Moreover, demand and consumption of energy does not directly depend on the purchasing power of people. As a result, energy producers and suppliers are destined to grow. Thus, investments in EM energy companies are quite safe. Although governments are taking measures to gradually reduce their dependence on this sector and invest more in developing eco-friendly substitutes for this industry, it’ll take some decades for the world to get rid of fossil fuels.
In an emerging market, consumption of power and other utilities is bound to increase. However, natural gas prices have more than doubled due to global shortages exacerbated by Russia’s invasion of Ukraine. Extreme climate conditions (droughts, hurricanes, heat waves, wildfires, etc.) also continue to test grid resilience. In response, the policymakers and industry experts are working to bolster reserves, harden infrastructure, deploy energy storage and microgrids, and strengthen flexible load options. Inflation, high energy prices and supply chain disruptions is expected to keep electricity prices elevated, while extreme weather, growth of renewables, cybersecurity threats, and distributed energy resources may disrupt this industry. Despite challenges, new technologies and supportive policies, innovation and better grid management could ripen opportunities and help the industry achieve its goals.
Basic materials include chemical products (agricultural fertilizers, industrial gasses, and specialty chemicals used to make glues and paints) metals and mining (minerals, oil, gold, aluminum, silver, and steel), and forestry products (lumber, paper, cardboard, etc.). Supply of all these natural resources is finite. Governments throughout the globe levies taxes on basic materials to help control and limit the exploitation of natural resources. However, that increases the cost. When the cost of discovering and producing basic materials increases, prices of consumer products that are made from those raw materials also increase. Also, an increase in interest rates leads to low demands in housing, a sector which requires a huge supply of basic materials. So, basic materials sectors will have some difficulties, and the companies will not find it as smooth sailing. However, a finite supply of resources will enable the companies operating in this sector to achieve above-average growth rates.
Investment Thesis
Core sector farms from Brazil, India, Chile, South Africa, Taiwan, China, Malaysia, and Thailand are poised for high growth in the coming decade. Oil and gas are the backbone of any economy since it is essential for most economic activities. In an emerging market, consumption of power and other utilities is bound to increase. As the supply of all basic materials is finite, companies operating in these sectors are always expected to achieve above-average growth rate. Thus, investments in core sector firms in emerging markets are quite safe and rewarding. Investors generally treat investments in these markets to be much riskier. But, in my opinion, the kind of markets and sectors this fund is investing in should instill confidence within them.
iShares Emerging Markets Dividend ETF has an AUM of $594.5 million, which it invests in dividend paying stocks from high growth emerging markets. It has been able to generate strong yield and total returns over the medium term. Total return in 2022 has been extremely poor. However, that’s the case for the broader market, too. DVYE has a moderate expense ratio and is trading at a negligible premium. It targets the core sectors (materials, energy, utilities, financials) and its top 20 investments consist of core sector firms from Brazil, India, Chile, and South Africa. Going by the historical trend, its investments in dividend-paying core sector firms, and the growth prospect of such firms, I think its current level of yield and total return is very much sustainable.
