Archive for the ‘Stocks On Non-US Exchanges’ Category

WisdomTree Middle East ETF Outperforms S&P 500, But Investor Beware

Friday, June 7th, 2013

In our yield, valuation, volatility and return screen for superior equity ETF performance today, the WisdomTree Middle East ETF came out on top. It has an attractive looking yield in excess of 4% as well as outperforming the S&P 500 over the past 12 months. However, below the surface looking at it holding-by-holding, it does not look very good.

We used Fidelity data to screen for non-leveraged, non-inverse equity ETFs with at least three years of history (505 ETFs)  that are in the better 1/2 for each of 3-yr Sharpe Ratio (median value 0.79), 3-yr total return (median value 14.60%), annualized yield (median value 1.80%), and price-to-cash flow (median value 8.20).

There were 37 ETFs that passed that screen.

We then filtered those 37 ETFs for those that have a 1-yr Beta to the S&P 500 of less than 1.10, an annualized yield of 3% or more, and a 3-year Sharpe Ratio of 1.00 or more.  There were 8 ETFs that passed that filter, shown in this table.


This table provides data from Fidelity for Beta, yield, P/CF, P/E, standard deviation, and Sharpe Ratio for the 8 ETFs.


Of those 8, only 3 outperformed the S&P 500 based on dividend adjusted price charts from

  • DES
  • DON
  • GULF

These two relative performance charts compare dividend adjusted performance of the 8 ETFs vs the S&P 500 ETF (SPY).



Profiles (from Yahoo Finance) of the 3 ETFs that outperformed the S&P 500:

The investment seeks to track the price and yield performance, before fees and expenses, of the WisdomTree SmallCap Dividend Index. The fund employs a passive management – or indexing – investment approach designed to track the performance of the WisdomTree SmallCap Dividend Index. It attempts to invest all, or substantially all, of its assets in the common stocks that make up the index. The index is a fundamentally weighted index measuring the performance of the small-capitalization segment of the U.S. dividend-paying market. The fund is non-diversified.

The investment seeks to track the price and yield performance, before fees and expenses, of the WisdomTree MidCap Dividend Index. The fund employs a passive management – or indexing – investment approach designed to track the performance of the WisdomTree MidCap Dividend Index. It attempts to invest all or substantially all of its assets in the stocks that make up the index. It normally invests at least 95% of total assets in the component securities of the index. The index is a fundamentally weighted index that is comprised of the mid-capitalization segment of the U.S. dividend-paying market. The fund is non-diversified.

The investment seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Middle East Dividend Index. The fund employs a passive management – or indexing – investment approach designed to track the performance of the index. It attempts to invest all, or substantially all, of its assets in the common stocks that make up the index. The fund normally invests at least 95% of its total assets in the component securities of the index. The index is a fundamentally weighted index that is comprised of companies in the Middle East region that pay regular cash dividends on shares of common stock. The fund is non-diversified.

Comment On The Indexes

All three ETFs are from WisdomTree and are based on their fundamental dividend weighted indexes.  Presumably, that tends toward higher quality companies.  That may well be the case for DES and DON, although we have not at this point analyzed the individual constituents of each index.

With regard to GULF, however, we have analyzed the individual holdings and are not comfortable with a quality assumption.

GULF has 50 holdings from 7 Middle East countries:

  • 37.66% UAE
  • 27.85% Qatar
  • 16.60% Kuwait
  •  7.79% Morocco
  •  5.96%  Eqypt
  •  3.14% Oman
  •  1.07% Jordan

There are higher risks in these frontier stock markets than in the US, and it is less reasonable to make assumptions about the quality of the dividend stocks there.  Accordingly, we used the Wright Investor’s Service quality rating system (covers more than 30,000 stocks in the ThomsonReuters Worldscope database) to evaluate the quality of the GULF holdings.

The Wright rating system is described at the end of this post.  The data and chart that follow were obtained at

To get a feel for the relative quality of the GULF holdings versus a US large-cap standard, we analyzed the 50 stocks in the Russell Top 50 US stocks (proxy XLG) using the Wright system, and converted their letter and number ratings to a 100 point scale, and then set the quality level of the Russell index at 100.  We then rated GULF holdings in the same way to determine the quality relative to the Russell Top 50.

The quality rating of each holding of each ETF was weighted by the weight of the stock within the ETF.

Here is how GULF stacked up relative to XLG.


GULF on an overall basis has 76% of the quality of the Russell Top 50, somewhat higher ratings for individual dimensions of liquidity, financial strength and profitability, but only about 1/2 of the overall growth rate.

Of the 50 stocks in the WisdomTree Middle East index only 7 have (1) average or better liquidity, (2) investment grade financial strength and profitability, and (3) at least a moderate overall growth rate.

In the Wright rating method, investment grade would require an A or B rating (on the A, B, C, D scale) and a growth rating of at least 4 (on their 20 point scale).   Those stocks are:


The other 43 are significantly lacking in one or more of those categories, and some of them are very low quality, such as these (where “L” means limited and “N” means insufficient data).


Among the best rated stocks, not all are particularly attractive as dividend stocks.

These charts from for the best 7 holdings show the price, earnings and dividends for 5 years.








While we like companies with a significant management stake, we are a little uncomfortable with foreign companies in emerging or frontier markets where insiders own a huge controlling stake in the company.  Insider control is very common in developing markets.  Insider control in combination with underdeveloped investor protections and uncertain auditing, substantially increases risks.

Here is a table of yield, payout ratio and insider percent holdings for the 7 quality constituents of the 50 stock WisdomTree Middle East index.  The 2 of 7 with more than 50% would give us particular pause.  The 40+% stakes would all create effective management control.


You might well want to invest in the Middle East, and GULF may be a best available alternative for that, but in addition to the obvious geopolitical risks of the region, and the investment operations risk of investing in frontier markets, be aware that if you looked at the individual holdings you would be very unlikely to want to own the vast majority of them.

If you would not want to own the constituents, you might not want to own the index.

Know what you own and know why you own it.  Be careful.


The Wright Quality Rating, measures the overall investment quality of a company.

Wright Quality Ratings are based on numerous individual measures of quality, grouped into four principal components:

  1. Investment Acceptance (i.e. stock liquidity),
  2. Financial Strength,
  3. Profitability & Stability, and
  4. Growth.

The ratings are based on established principles using 5-6 years of corporate record and other investment data.

The ratings consist of three letters and a number. Each letter reflects a composite qualitative measurement of numerous individual standards which may be summarized as follows:

  • A = Outstanding;
  • B = Excellent;
  • C = Good;
  • D = Fair;
  • L = Limited;
  • N = Not Rated.

The number component of the Quality Rating is also a composite measurement of the annual corporate growth, based on earnings and modified by growth rates of equity, dividends, and sales per common share. The Growth rating may vary from 0 (lowest) to 20 (highest).   The highest quality rating assigned by Wright is AAA20.

Filter for Quality High Yield Dividend Stocks In MSCI Spain Index

Monday, April 16th, 2012

Spain is a wreck. Let’s start with that as a framework, but are there any dividend growth companies there that seem to be weathering the problems?

We examined the 5 and 10 year dividend history of all stocks in the MSCI Spain country index (same stock as in the iShares Spain fund, EWP) to see if any displayed a pattern of continuous and rising dividend payments, with a high current yield, a reasonable payout ratio for their industry, good long-term growth prospects, and evidence of reasonable price multiples. We found two prospects.

This article reviews the top ten stocks in the index, and the two quality high yield prospects, which happen not to be in the top 10.

The two companies are:

  • Red Electrica (a power grid management company) — local symbol REE
  • Enagas (a natural gas pipeline) — local symbol ENG

Each stock yields over 7% with a 10-year history of dividend payments and increases.

First A Quick Look at Some of the Problems in Spain:

Unemployment is highest in developed Europe at 23%. Austerity programs to be implemented will increase unemployment further. The GDP is falling. Bond yields are at about 6%, a level that stimulated ECB intervention in the recent past. The CDS yield spread to Germany is about 510 basis points, which Bloomberg reports implies a 37% chance of default.

This histogram from Markit places Spain vis-à-vis other nations in terms of 2012 Q1 PMI and new orders. It does not look good — better than Greece, but not by much.

The result of all that bad news tends to be a reduction in revenue, profits, and probably margins; and therefore likely also dividends by many Spanish companies.

click image to enlarge

MSCI Spain Index vs. S&P 500, the EU, Germany, France and Italy Since the U.S. Stock Market Bottom in March 2009:

The S&P 500 (proxy SPY) is in the best shape now (black line in the chart). Germany (proxy EWG) is in the second best shape, having formerly been ahead of the S&P 500 in 2011. The eurozone (proxy EZU) and France (proxy EWQ) are at the same level. Italy (proxy EWI) and Spain (proxy EWP) are bringing up the rear with Spain a bit ahead of Italy — both down quite substantially from the early 2011 highs, before the Europe debt crisis became a headline issue.

Top Ten Constituents of MSCI Spain Index + Two Good Dividend Performers From the index:

This table lists the top ten holdings of the MSCI index (and EWP, the Spain ETF). I also shows two stocks from a lower weight in the index that have good yields and a consistent history of dividends and dividend increases — through and since 2009 up to the present.

click image to enlarge

The data in the chart is the percent weight in the index, the rank in the index, the indicated yield, the market-cap in U.S. dollars, the trailing payout ratio, the trailing P/E ratio, the forward estimated P/E ratio, the PEG ratio, the enterprise value to EBITDA, the price-to-sales and the price-to-book ratio.

The yields are mostly high, but you will note that some of the stocks have payout ratios above 100%. Some have announced plans to reduce dividends.

The symbols used are the local Spanish market symbols. Some of the stocks have U.S. ADRs (some exchange listed and some pink sheets).  We  discourage the use of pink sheets in most instances.  The two stocks that we have identified as potentially interesting dividend stocks do not have exchange listed ADRs.

The companies in the list are (local market symbols):

TEF Telefonica
SAN Banco Santander
BBVA Banco Bilboa Vizcaya Argenta
ITX Inditex
IBE Iberdrola
ABE Aberis Infraestructuras
SAB Banco de Sabadell
GAS Gas Natural SDG
AMS Amadeus IT Holdings
REE Red Electrica
ENG Enagas

Price, Earnings and Dividend Charts:

These charts in local currency from CorporateInformation, plot up to five years of prices, earnings and dividends. You fairly quickly see which have good looking dividend curves and which do not.

TEF has a nice historical dividend curve, but they have announced that they may have to reduce dividends, and their payout is over 100%.

SAN has an OK looking dividend curve, but they are a bank, and we wouldn’t go near any bank in Spain at this time — and they also have a payout above 100%.

ABE has a nice looking dividend curve, but the yield is not particularly high, and growth is weak, according to the Wright’s rating.

AMS might end up being attractive, but does not have enough history at this time, and the yield is unremarkable.

REE and ENG have attractive yields, consistent dividend payment histories, non-excessive valuation multiples, comparatively stable prices, and an infrastructural character, which may help insulate them somewhat from the unemployment problem.

REE is a power grid management company, and ENG is a gas pipeline company. ENG has a near 100% payout, but like pipeline companies in the U.S., payout is better measured versus cash flow.


Business Descriptions for REE and ENG:

REE: Red Electrica Corporacion SA is a Spain-based company primarily engaged, through its subsidiaries and affiliates, in the energy sector. The Company specializes in the transmission of electric energy, as well as in the operation of electric systems. The Company manages the Spanish high-voltage transmission grid and is responsible for its development, maintenance and improvement of the network’s installations. The Company’s activities also include the coordination between the generation, transmission and distribution of electric energy.

ENG: Enagas SA is a Spain-based company primarily engaged in the transport and underground storage of natural gas, as well as in the regasification of natural gas to the National Pipeline Network. The Company operates a network of more than 9,000 kilometers of high-pressure gas pipelines located in the Spanish territory that have international connections with France, Portugal and Morocco. Its facilities also include three regasification plants operating in Barcelona, Cartagena and Huelva, and two underground natural gas storage units established in Huesca and Biscay. In addition, the Company offers such services as offloading liquefied natural gas (LNG) from ships to regasification terminals; LNG, carbon dioxide, hydrogen and biogas tank loading; development of direct gas pipelines; laboratory certification services and other services related to infrastructure.

Financial Dimensions of REE and ENG:

Dimension REE ENG
Total Debt/Total Assets 0.55 0.64
Total Debt/EBITDA 3.89 5.36
EBITDA/Total Interest 5.4 6.3
EBITDA/Total Dividends 4.8 4.2
Quick Ratio 0.2 1.0
Current Ratio 0.2 1.0
Inventories/Current Assets 0.10 0.01
Receivables/Current Assets 0.85 0.27

Dividend Payment History of REE and ENG:

2001 0.46 0.47
2002 0.48 0.23
2003 0.55 0.30
2004 0.62 0.33
2005 0.73 0.40
2006 0.90 0.47
2007 1.09 0.60
2008 1.28 0.65
2009 1.48 0.75
2010 1.88 0.84
2011 2.22 1.37

Investment View:

Spain is a wreck. Things will likely get worse. There are much safer places to invest.

However, if you wish to pick through the rubble, and find potentially interesting dividend opportunities, that have a good history and some logic for a good future, REE and ENG may be worth a further look.

As core infrastructure companies, without which the country would have some difficulty operating, these two are prospects for further research for those long-term investors who are searching for equity income and growth.


Disclosure: QVM has no positions in any of the Spanish stocks identified in this article as of the creation date of this article (April 16, 2012).

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.

Extra Risk on Non-U.S. Exchanges: If securities on non-U.S. exchanges were identified, our supplemental disclaimer is available here.