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Avoid Emerging Markets Index Pitfalls With This ETF

BY | ETF Database
10:05 am ET 09/02/26 | 8 VIEWS
Emerging markets equities and the related ETFs are delivering some impressive performances this year. Still, savvy advisors and investors look beyond the headlines.Some of the most popular index-based emerging markets ETFs have become bets on a small number of stocks from very few countries. For example, the widely followed MSCI Emerging Markets Index allocates 15% of its weight to just one stock – Taiwan Semiconductor (TSM). Two more stocks, Samsung Electronics and SK Hynix (SKHY) combine for another 12.6%. Overall, the index devotes almost 42% of its weight to tech stocks. Additionally, more than 48% of its portfolio to Taiwanese and South Korean equities. Fortunately, some ETFs deliver more balance (and income) with emerging stocks. Enter the ALPS Emerging Sector Dividend Dogs ETF (EDOG A-).Examine EDOG for EM DiversificationThe MSCI Emerging Markets Index is a cap-weighted gauge. The large weights to the aforementioned trio of stocks reflect that status. EDO, which turned 12 years old in March, does things differently. The ALPS ETF tracks an index that focuses on the five highest-yield stocks from 10 sectors (real estate is excluded). Those 10 sectors are equally weighted, resulting in a diverse portfolio. This is something to consider at a time when even active managers are struggling with emerging markets concentration risk. “To avoid getting waylaid by a single company’s misfortune, many funds keep individual stock positions to 5% of assets or less,” noted Gregg Wolper of Morningstar. “Matching the big three’s index weightings would therefore require managers to toss aside a key risk-control measure. Even a half-weight in TSMC would still exceed 5%.”EDOG's HoldingsFor its part, EDOG doesn’t devote more than 4.95% of its weight to any of its holdings. None of its geographic exposures command more than 11.20% of the portfolio. Those traits are all the more meaningful at a time when passive emerging markets funds are highly concentrated and some active managers are in potentially precarious positions when dealing with that fact. “It’s perilous merely to match the weightings of an index that has more than one-fourth of its assets in just three stocks,” added Wolper. “Yet if a fund underweights or avoids one or more of them, it will lag far behind the index and peers if those stocks continue to skyrocket. In an exuberant market, fund shareholders expect to rake in the gains. Failure to do so can endanger a manager’s career.” With EDOG, those aren’t concerns investors need to fret about. For more news, information, and analysis, visit the ETF Building Blocks Content Hub. VettaFi LLC (“VettaFi”) is the index provider for EDOG, for which it receives an index licensing fee. However, EDOG is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of EDOG.

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