Be Cautious With Emerging-Markets Dividend ETFs

Investors are dipping back into emerging-markets stocks. In March 2014, flows into diversified emerging-markets open-end funds and exchange-traded funds turned positive after four consecutive months of outflows. Fundamentals in emerging markets have not necessarily improved, but investor sentiment has. According to the Bank of America Merrill Lynch Fund Manager Survey for April, 55% think emerging markets are undervalued, up from 49% in March. More interestingly, only 2% indicated a desire to underweight emerging markets, down sharply from 21% in March.

There are plenty of solid dividend-paying stocks to be found in emerging markets, and open-end funds that have a manager at the helm can take both a quantitative and qualitative approach to select higher-quality holdings. Dividend ETFs, on the other hand, operate on autopilot. Given the broad mix of countries and many political, economic, and regulatory forces in emerging markets, investors should apply a higher degree of scrutiny to emerging-markets dividend funds before investing.

Source: Morningstar

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