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The Opportunity in Emerging Markets Dividend Aristocrats

  • The growth trade has been a tailwind for equity investors for the past 5 years, across both developed and emerging market indices.
  • At SPDR, we recently celebrated two years since the adoption of a Dividend Aristocrats approach in emerging market equities.
  • With an established track record and the shifting growth/value dynamics in equities, investors could consider the opportunity in an emerging market Dividend Aristocrats strategy.

Two years after the index change, why now may be the right time for emerging market Dividend Aristocrats

At SPDR ETFs, we recently passed the 2-year anniversary since the adoption of the S&P Emerging Markets High Yield Dividend Aristocrats® Index as the benchmark for our SPDR® S&P® Emerging Markets Dividend Aristocrats UCITS ETF.1 To learn more about the ETF, and to view its full performance history, please visit its fund page.

In the past 5 years, the market capitalisation-weighted MSCI Emerging Markets Index has been driven by the rally in hyper-growth stocks that have benefited from the structural shift in the global economy. Similar to the highly covered FAANG complex in US equites, the MSCI Emerging Markets Index has experienced a concentration in return contribution from stocks in the consumer discretionary (Alibaba), technology (Taiwan Semiconductor, Samsung) and communication services (Tencent) sectors (see Figure 1).*

Figure 1: Top/Bottom Contributors to Return (Market Benchmark)

Much of the strong performance for the MSCI Emerging Markets Index is attributable to the large position of Alibaba Group in the market-capitalisation weighted index and its strong performance during the referenced time period. Over the 5 years from 31 January 2017, Alibaba made up c. 24% of the market benchmark on average and is up 107%. This position contributed 24.62 of the 57.56 estimated nominal return (and explains c. 42%). Alibaba does not pay a dividend and has traded at an average P/E of 36.7x and P/B of 6.5x over the last 5 years.2 In retrospect, the environment was beneficial for indices holding high growth stocks, such as Alibaba.

In the 2 years since our SPDR® S&P® Emerging Markets Dividend Aristocrats UCITS ETF switched to tracking the newly created Dividend Aristocrats® Index (February 2020), our strategy has performed neutral with the market benchmark MSCI Emerging Markets Index, with both advancing by 5.5% over that time.3 On a year-to-date basis, the SPDR® S&P® Emerging Markets Dividend Aristocrats UCITS ETF has outperformed the market benchmark MSCI Emerging Markets Index by 4.07% (see Figure 2). Much of the positive contribution can be explained by the more recent reversal in the growth/value trade, as well as strong stock selection in real estate, where the Dividend Aristocrats standard appears to be beneficial.

Figure 2: Brinson Attribution by Sector (Portfolio vs. Market Benchmark)

The focus of Dividend Aristocrats on dividend stability would have decreased the historical yield of the portfolio – Dividend Aristocrats is arguably a more conservative approach – but the new index would still have provided a yield premium to the market, on a back-tested basis (see Figure 3). The index yield premium has expanded since the beginning of 2020. The S&P Emerging Markets High Yield Dividend Aristocrats® Index also offers a significant amount active value factor exposure. Value is the third strongest exposure after yield and size (see Figure 4).

Figure 3: Dividend Yield History (Back Test*)

Figure 4: FaCS Absolute Exposure