SPEM: Robust, Well-Diversified Emerging Market Portfolio Offering A Decent Yield

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~ By Snehasish Chaudhuri, MBA (Finance).

SPDR Portfolio Emerging Markets ETF (NYSEARCA:SPEM) is an exchange-traded fund (“ETF”) that invests in public equities in emerging markets (“EM”) around the globe. The fund has been consistently paying dividends with a decent yield. The dividend seems sustainable. I tested my “7 Factor Model for Evaluating Emerging Market Funds” on SPEM and found that this fund is a reasonably good fund. Historically, the fund has generated decent total return for its investors. The fund is trading almost at par with its net asset value (“NAV”) of $32.65. Its portfolio is well-diversified globally, and the fund has invested in the right markets and the right sectors. A detailed discussion will make it clear how SPEM performed in those seven most-critical parameters.

SPEM Uses Representative Sampling On S&P Emerging BMI Index

SPDR Portfolio Emerging Markets ETF was launched by State Street Global Advisors, Inc., and is managed by SSGA Funds Management, Inc. The fund deals with a high amount of asset under management (“AUM”), when compared to other emerging market equity funds, such as First Trust Emerging Markets AlphaDEX ETF (NYSE:FEM), PIMCO RAFI Dynamic Multi-Factor Emerging Markets Equity ETF (NYSE:MFEM), Deutsche X-trackers MSCI Emerging Markets Hedged Equity ETF (NYSE:DBEM), First Trust RiverFront Dynamic Emerging Markets ETF (NYSE:RFEM), Lattice Strategies Trust – Hartford Multifactor Emerging Markets ETF (NYSE:ROAM), etc. It seeks to track the performance of the S&P Emerging BMI Index (NYSE:SPCBMIREMUSD) by using representative sampling. The index is composed of 5200 stocks.

Despite being an emerging market fund, SPDR Portfolio Emerging Markets ETF invested in equities of some of the most renowned companies worldwide. Its top 12 investments included Taiwan Semiconductor Manufacturing Company Limited (TSM), Tencent Holdings Limited (OTCPK:TCEHY), Alibaba Group Holding Limited ADR (BABA), Reliance Industries Limited ADR (RELIANCE.NS), Meituan (OTCPK:MPNGF), Infosys Limited (INFY), ICICI Bank Limited ADR (IBN), China Construction Bank Corporation (OTCPK:CICHY), Housing Development Finance Corporation Limited (HDFC.NS), HDFC Bank Limited (HDB), Tata Consultancy Services Limited (TCS.NS) and Vale S.A. (VALE).

The market price of SPDR Portfolio Emerging Markets ETF fell by 23 percent and 20 percent over the past 1 year and 2 years, respectively. Past 12 months have been really bad for the broader market, and all stocks have suffered. But the fund should have performed much better during 2021. However, I am not too worried about that. Some time back, I analyzed two other emerging market funds, namely Western Asset Emerging Markets Debt Fund (EMD) and Invesco Emerging Markets Sovereign Debt Portfolio ETF (PCY), and found that emerging market funds performed poorly in 2021, too. Between 2016 and 2022, SPEM was successful in generating high positive total returns in four out of five years. The annual average return in those 5 years was 13.5 percent, which makes this fund quite attractive.

SPDR Portfolio Emerging Markets ETF Has A Diversified And Balanced Portfolio

Emerging markets, by their nature, are in a growth phase. When an economy is growing, in most cases three sectors derive the maximum benefits – Information and communication technology (ICT), financial, and consumer cyclical. These industries do not witness exceptionally high growth in either developed or underdeveloped economies. As compared to advanced economies, people in emerging markets generally have a lower cost of living and less luxurious lifestyles. So, when the economy starts booming, people spend more on luxuries. Moreover, the economic growth is fueled by the growth in the ICT sector and supported by the financial sector.

I find that SPDR Portfolio Emerging Markets ETF has invested almost 60 percent of its assets in these three sectors. The fund has also diversified its investments among more than 3000 stocks, and its top 25 holdings consist of only 25 percent of its total portfolio. It may seem that it is buying stocks of all these companies in a very low volume. However, even 1 percent of $5.75 billion AUM is capable of buying a decent volume of equity shares in emerging markets. Due to such diversification, the performance of a particular stock will hardly have any impact on the performance of the entire portfolio. I also find that this fund is quite consistent with its investments, as the annual turnover is only 12 percent. Due to such low turnover, the expense ratio is extremely low at 0.11 percent despite having investments in more than 3000 companies.

Emerging markets offer strong dividends as well as scope of capital appreciation. The economic trends in China, India, Taiwan, Hong Kong, Brazil, Mexico, South Africa, Indonesia, Thailand, Malaysia, Philippines and some of the Gulf Cooperation Council (“GCC”) nations are encouraging. SPDR Portfolio Emerging Markets ETF invested at least 1 percent of its total assets in each of these markets. China, India, and Taiwan are expected to experience consistent and above average economic growth rates throughout this decade. SPEM provides an opportunity to benefit from these high-growth emerging economies and has invested in some of the largest companies from China, India and Taiwan. The fund invested almost 64 percent of its assets in these three markets. To sum up, SPEM has invested in the right sectors, in the right markets, and has properly diversified its investments.

SPEM Scores Well in “7 Factor Model for Evaluating Emerging Market Funds”

SPDR Portfolio Emerging Markets ETF was formed on March 20, 2007 and has been paying semi-annual dividends since 2009. The annual average yield has been in the range of 2 to 4 percent. The four-year average yield is 2.77 percent, and the trailing twelve months (“TTM”) yield is 4.26 percent. The yield is not lucrative, but at the same time not discouraging, either. In my opinion, SPEM’s portfolio is comparatively less risky, due to its high level of diversification, low expense ratio, lower volatility, and investment in growing but credible economies. Barring Brazil and South Africa, sovereign bonds of all the other countries are rated above BB+. In fact, SPEM has not invested in Oman and Bahrain (due to low sovereign rating) despite both of them being emerging and wealthy GCC economies.

I find SPDR Portfolio Emerging Markets ETF to be a reasonably good fund according to my “7 Factor Model for Evaluating Emerging Market Funds.” It qualifies for the minimum requirements with respect to AUM and stock price. However, the yield is lower than 5 percent. The fund is also trading at a premium to its NAV, but again that’s negligible. The portfolio is well-diversified globally, and across a huge number of stocks. Lower risk and potential growth of equities in emerging markets are expected to sustain the current level of yield.

The only major drawback comes in the form of its recent price performance. The fund has failed to generate positive total return for its investors during the past 2 years. However, if we overlook the performance over the past two years, SPEM generated high returns between 2016 and 2020 and recorded an annual average total return of 13.5 percent. I am generally positive about the prospects of SPEM.