Tags: Zacks | ETFs | emerging | markets

Zacks: Emerging-Market ETFs a Safer Haven in Fiscal Cliffhanger

Friday, 30 Nov 2012 03:00 PM

By John Morgan

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The double bogeyman of dividend tax hikes and the fiscal cliff uncertainty add up to a buy recommendation for selected emerging markets exchange-traded funds (ETFs) from Zacks Investment Research.

Businesses have curbed investments and investors are selling stocks ahead of potential capital gains tax increases, Zacks said. Compounding the uncertainty is anticipation of tax rate hikes on dividends.

If the current Bush-era tax cuts are not extended by Jan. 1, long-term capital gains taxes could jump from 15 percent to 20 percent, and dividends will be taxed as income at rate of up to 39.6 percent.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

“For investors who are concerned about the ‘dividend-cliff’, an attractive option is to invest in the emerging-markets dividend ETFs that combine the opportunity to benefit from the higher growth potential in the emerging markets with the steady flow of dividend income in addition to providing the escape from the fiscal cliff issues in the U.S.,” Zacks analyst Neena Mishra wrote.

Mishra listed a variety of reasons why emerging-market dividend ETFs could make sense for U.S. investors now. Among them:

• Stocks held by these ETFs should not be affected by U.S. fiscal cliff issues.

• About 70 percent of global dividends now come from non-U.S. companies.

• Emerging markets represent about one-third of the world’s gross domestic product, and their share should continue growing in coming years.

• Estimated growth of emerging markets averages 5.6 percent for 2013, versus 1.5 percent growth for developed economies.

• Emerging-market companies often pay a higher dividend yield than U.S. companies do.

Mishra recommended investors consider three specific emerging-markets dividend ETFs: the WisdomTree Emerging Markets Equity Income Fund (DEM); the SPDR S&P Emerging Markets Dividend ETF (EDIV); and the Emerging Markets Dividend Index Fund (DVYE).

Bridgewater Associates, the world’s largest hedge fund, in the third quarter boosted its holdings in the Vanguard MSCI Emergency Markets ETF (VMO) by nearly 10.5 million shares, and also added 1.6 million shares to its existing stake in IShares MSCI Emerging Markets Index Fund (EEM), Benzinga reported.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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