SDEM: High Performance with 3 Red Flags (NYSEARCA: SDEM)

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This series of articles on dividend ETFs aims to evaluate products based on the relative past performance of their strategies and the quality of their current portfolios. As holdings and their weightings change over time, reviews can be updated as needed.

SDEM strategy and portfolio

The Global X MSCI SuperDividend Emerging Markets ETF (NYSEARCA: SDEM) tracks the MSCI Emerging Markets Top 50 Dividend Index since 03/16/2015. As of this writing, it has 54 holdings, a 12-month return of 12.4% and a total expense ratio of 0.67%.

Net asset value (around $60 million) and average trading volume (around 35,000 shares/day) are low for an ETF. This can be a concern for the fund’s long-term survival and short-term tradability (the use of limit orders is absolutely necessary).

As described by MSCIthe underlying index includes large and mid-cap stocks in 27 emerging market (EM) countries*. The index aims to reflect the performance of 50 stocks in the MSCI EM index, selected on the basis of dividend yield which have increased or maintained their dividend per share compared to the previous year or have increased or maintained their payout ratio (defined as dividend per share/earnings per share) if dividend per share has declined by up to 10%”.

The constituents are of equal weight each time the index is reconstituted.

China is by far the heaviest country with 24.7% of asset value, followed by Brazil (12.5%). Other countries are below 10%. When I last rated this fund in November, Russia was number two with a weighting above 13% of asset value. The fund had to abandon Russian assets with heavy losses due to regulations relating to the war in Ukraine. The geopolitical risks integrated into the portfolio are still very high: the aggregate weight of China, Taiwan and Hong Kong is 35%.

SDEM countries (% weight)

SDEM countries (% weighting) (Chart: author with GlobalX data)

The heaviest sector is materials (29.2%), followed by finance and energy (17.5% each). The other sectors are below 7%.

SDEM sectors (% weight)

SDEM sectors (% weighting) (Chart: author with GlobalX data)

In the size segmentation, large and mid caps account for 98% of asset value.

Size segments

Size segments (graph: author; data: Fidelity)

The top 10 holdings, listed below, represent approximately 24% of the portfolio’s value. The constituents are of equal weight each time the underlying index is reconstituted, but price variation can cause significant weight shift. The main holding weighs 2.62% at the time of writing.

Last name

Teleprinter

% of net assets

YANKUANG ENRGY-H

1171HK

2.62

EMPRESAS CMPC SA

WACC CI

2.61

COAL INDIA LTD

COAL ENTRY

2.61

LITE-ON TECHNOLOGY CORP

2301 TT

2.43

BIM BIRLESIK MAGAZALAR AS

BIMAS IT

2.41

SIME DARBY BERHAD

SIME MK

2.38

BHARAT PETROLEUM CORP LTD

BPCL IN

2.35

ELECTRONIC COMPAL

2324 TT

2.31

Cia Energetica de Minas G

CMIG4 BZ

2.3

CHINA INTERNATIONAL ENERGY

HK$2380

2.29

Past performance against competitors

The First Trust Dow Jones Global Select Dividend ETF (FGD), reviewed here, the WisdomTree Emerging Markets High Dividend Fund (DEM), reviewed here, and the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS), reviewed here, are dividend ETFs international markets with lower (but still high) yields in the 5-8% range. SDEM has delayed them all since its inception by a wide margin. It is the only loss in this list for this time frame, and also the most volatile.

Full return

Annual return

Sampling

Sharpe report

Volatility

SDEM

-18.89%

-2.80%

-47.00%

-0.08

21.02%

FGD

25.06%

3.08%

-43.26%

0.23

17.84%

DEM

21.29%

2.65%

-40.07%

0.19

18.03%

DGS

35.15%

4.17%

-43.07%

0.27

17.96%

Data calculated with Portfolio123

In fact, SDEM has suffered a capital decline of 49% since its inception, as shown in the share price chart below.

SDEM share price

SDEM stock price (TradingView on Seeking Alpha)

The full picture for an income-seeking investor is not a pretty one, given the tax paid on distributions and inflation. The flow of income is also likely to decrease in nominal value in the future: the return cannot increase indefinitely to compensate for the deterioration of the capital.

Carry

SDEM is invested in 50 high yield stocks listed on emerging markets. Its equal weight policy and balanced sector structure look good, but it has three red flags. First, low net asset value and liquidity can threaten its own long-term existence. Second, 35% of asset value is exposed to China-related geopolitical and regulatory risks. Finally, the share price has lost 49% of its value since its inception, and the distributions are very far from compensating for this loss. SDEM could be used as a trading instrument, but my opinion is that it should not be part of a sustainable retirement plan. This is true for a number of high yield instruments, not just SDEM. For transparency, a portion of my dividend-oriented equity investments are split between a passive ETF allocation and my actively managed stability portfolio (14 stocks), disclosed and updated in Quantitative Risk & Value.

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