Did you know the Dubai stock market has been crashing?
The Dubai Financial Market General Index fell from a high near 5,400 on 5/6/14 to below 4,000 this past week.
It now sits near 4,200, down over 20% in under two months.
The selling in the Middle East has affected specific Middle East focused ETFs like the iShares MSCI Qatar (QAT) and the iShares MSCI UAE (UAE), but the WisdomTree Middle East Dividend Fund (GULF), which holds almost 50% banks, is down over 10% in price since May with more of its holdings exposed to the Dubai selling.
The Dow Jones Middle East & Africa Index (^DWMFST) has fared much better, weighted more heavily in Africa than the Middle East, but not everything has escaped the damage.
Another ETF with supposed Middle East exposure is the SPDR Emerging Middle East and Africa (GAF), however a look at its prospectus reveals it holds zero exposure to the Middle East and as a result its price has barely been affected by the Middle East’s price decline. GAF’s exposure is extremely concentrated, with 93% of its holdings from South Africa, which has largely helped it avoid the ramifications of the selling elsewhere.
Yield Chasing = Bad
Even after falling 15%, GULF’s dividend yield still remains under 3%, a great example of how chasing yield in this low rate environment can be extremely dangerous.
A yield of only 3% does very little to protect you when the underlying asset falls such a large amount (in this case over 10% thus far). This is one of the key differences between a bond and a stock and why stock dividends should not be compared directly to bond yields.
With a bond you are typically guaranteed a return of your principal. A stock contains no such guarantee and GULF is a perfect example.
If you bought GULF in April or May, your yield was less than 2.5%, but the current decline has wiped out over four years of dividend gains, in only two months!
The reality of the situation only gets worse as one chases yields closer and closer to a top in price. This point was a topic discussed in our April 2014 Profit Strategy Newsletter article entitled, ‘The Most Crowded Trade Ever’ when we focused on the extremely low bond (and dividend) yields.
But in GULF’s case a price decline of 10% isn’t the end of the story.
AUDIO: What VIX is Saying: Chad Karnes on the Index Investing Show
Price Rising but not Dividends = Even Worse Yield
The chart below shows that even though GULF’s price has been rising the last three years, the amount of dividends paid out has actually been falling.
In 2012 GULF paid $0.66 of annual dividends. In 2013 this shrank to only $0.56 in annual dividends. After its recent June distribution, it looks as if 2014 will only pay $0.54 of dividends to holders (a yield at current prices of only 2.5%).