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Steady Growth with ETFs

By WealthTrust Arizona

As the world began the recovery process after the 2008 financial meltdown, emerging markets proved to be a bright spot. Countries like India, China and Brazil were able to deliver rapid economic growth and double-digit stock gains. There is a possible downside for those who venture into exotic markets: the risk of large, unforeseen losses. For example, from January through November 2011, emerging market funds sank 15.6% versus a gain for the S&P 500 of 0.4%.

Is there a way to capture the developing world’s rapid growth while avoiding downsides along the way? We have recently seen the emergence of several exchange-traded funds (ETFs) which track stock indexes made up of dividend payers in emerging markets. For example, WisdomTree Emerging Markets Equity Income was down 9% in 2011, and SPDR S&P Emerging Markets Dividend began last February and had a three-month loss of 13.8%. The benchmarks followed by such ETFs yield around 7%, compared to around 2% for the S&P 500.

As a rule, you should be skeptical of new funds which seemingly promise you can have you cake and eat it, too. Focusing on income might seem to be counterintuitive here, because dividends are usually associated with slower-growing companies. But in emerging markets, dividends are often seen as a show of strength. Dividend payers have sufficient supplies of money to grow, and thus do not need to issue new stock to raise capital, which dilutes the value of existing shares.

 If you are thinking about investing in these funds, here are some things to consider:

You cannot count on steady income.

There is no guarantee these funds will continue with yields close to 7%. The risk of ups and downs caused by political and economic instability can diminish your payouts.

You will pay additional taxes and fees.

They can carry somewhat higher expenses (for example, 0.63% of assets for DEM, versus just 0.22% for Vanguard MSCI Emerging Markets ETF.) You will also pay overseas taxes on distributions, but taxable investors who itemize are eligible to get a foreign credit or claim a deduction.

You will not get full diversification.

Funds which screen for high payers must often focus their bets. For example, DEM has around 40% of its assets in Brazil and Taiwan, while roughly 25% of their portfolio is in financials. You might want to split your investment in emerging-markets between dividend ETFs and more diversified offerings. One more thing to consider: given Wall Street’s knack for messing up good things, if you are thinking about trying a dividend strategy, you might want to consider acting now before the architects of EFTs get a chance to mess things up.


Please discuss with your financial planner to determine whether or not these kinds of ETFs are appropriate for your individual risk tolerance level.

DISCLOSURE: WealthTrust Arizona is a fee based investment advisory firm that specializes in integrating portfolio management with estate planning for high net worth individuals and families. Services include portfolio management, estate planning, asset and lifestyle preservation, taxation concerns, access to trust and estate documentation preparation, business succession planning and more. The professionals at WealthTrust -Arizona are frequently sought out by the national media such as The Wall Street Journal, Forbes, New York Times, CNBC, BloombergRadio, and others to share their thoughts on matters that impact our clients.

Given the recent events impacting investors and their financial security, we would welcome the opportunity to provide a second opinion for anyone who would like to have a check-up on their investments, financial plan or estate plan. If you know of anyone who may have a concern with their current advisor or current investment portfolio, we encourage you to share our contact information with those that could benefit from a complimentary review.

Advisory services offered through WealthTrust Arizona, a registered investment advisor. WealthTrust Arizona does not engage in the trust business in the state of Arizona or in any other jurisdiction. Not FDIC insured. Not bank guaranteed. May lose value, including loss of principal. Not insured by any state or federal agency.

 

 

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