DVYE: This emerging market dividend ETF fails our litmus test

investment thesis

We cover some of the BlackRock iShares ETFs here on Seeking Alphawith a primary focus on ETFs for the Asian markets, where we have lived and worked for more than thirty years.

Almost a year has passed because we covered the iShares Emerging Markets Dividend ETF (NYSEARCA: DVYE). At that time, our attitude was one of restraint, as we felt the ETF was carries too much risk.

However, the ETF’s price is up nearly 10%, and the total return when you include quarterly dividends is up to 19.6%.

That’s almost as good as the performance of the S&P 500, which rose 27% over the same period. It is important to note that the S&P 500 has outperformed most country stock indexes over a long period of time.

A $10,000 investment made on September 20 last year would be due today worth $11,960. But if you had invested the same amount 10 years ago, that would only be worth $9,859 today.

Investing in emerging markets over the last ten years has generally not been a good place to be, despite all the “experts” who come out every year saying “this will be the year” that emerging markets come back.

Features of DVYE

The fund’s net asset value increased from $618 million as of June 30, 2023 to $679 million as of August 22, 2024. It has good liquidity with an average daily volume over the past 30 days of approximately 75,000 shares.

The fund is benchmarked against the Dow Jones Dividend Index in selected emerging markets.

Its net expense ratio remains at 0.49%.

There have been some major changes to this ETF’s portfolio over the past year. A year ago, financial represented only 14% of the portfolio. It is now the largest with 22.5%.

Real estate has been halved from 5.45% to just 2.77%

This shift is most likely due to the effect of higher interest rates, which typically favor finance and burden borrowers such as real estate companies.

We were surprised to find Singapore on the list of countries last year, as it was not on the list of 20 countries classified by the IMF as emerging markets. There is no definition of what an emerging market is.

Dividends are paid quarterly and have been fairly stable.

DVYE currently has a dividend yield of 8.2%.

When we look at DVYE’s top ten components, we see that many of the companies offer high dividend yields.

When companies are trading at such low price levels that their dividend yields become double digits, we have to ask why this is so.

This brings us to risks and a conclusion.

Risk for thesis and conclusion

Emerging markets may see sustained traction in investor interest, but will not overtake developed economies such as the US

We still believe that the risks involved in DVYE companies in terms of corporate governance, particularly the risk of corruption, are higher than our tolerance level.

Three large Chinese state-owned banks are also on the list.

Financials is the second largest sector in our portfolio, but we have not invested in any banks in China. The reason is that we are not comfortable with their accounting standards. It is difficult to determine what is on the balance sheet and what liabilities are off the balance sheet.

Having worked with Indonesian coal miners for many years, transporting their coal, we are reluctant to invest in these companies as well, and the Evergreen shipping company went bankrupt and had to be bailed out by the Taiwanese government in the past.

As investors, we try to focus on investing in companies that we believe are of good quality. If it passes the litmus test, we start evaluating other metrics like valuations and strong balance sheets.

At this time, DVYE does not pass our test, therefore our position is for sale.