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Emerging markets have been on a tear and continue to outpace first-tier economies, and this ETF gets you into these dynamic markets in a rational way, writes Stephen Leeb of Income Performance Letter.

Emerging markets went from the hero to the goat in 2011, returning some of the worst equity-market returns in the world last year.

But stock markets in developing countries haven’t been this cheap in years. Indeed, the events of 2011 have pushed emerging-market valuations into the cellar. Price-to-earnings ratios, a benchmark commonly used to gauge how expensive a stock or index is relative to its underlying earnings power, have reached levels on an absolute basis not seen since the onset of the financial crisis in 2008.

Furthermore, companies in emerging markets that pay healthy dividends are an even better bet. Granted, the appeal of emerging-market equities is the blistering growth they can provide, but to us, the best of all worlds at the moment is an emerging-market company with rapid growth paying a strong, secure dividend.

Accordingly, we suggest adding State Street’s SPDR S&P Emerging Markets Dividend ETF (EDIV) to your portfolio.

Launched in February 2011, this ETF provides both a hearty current dividend yield and additional capital appreciation potential via exposure to high-quality stocks in developing and emerging nations. The fund’s $127 million portfolio is spread across over 100 positions in 20 nations, with Taiwan, Brazil, China, and Korea accounting for 19%, 17%, 9%, and 8.6% of assets, respectively.

All told, Asia makes up 43% of the fund’s assets, with Latin America at one-third and Africa/Middle East at just over 11%. Dividend yield in 2011 was a respectable 4.9%.

Nearly 17% of the fund’s portfolio is concentrated in the top ten positions, which are dominated by a 3% position in Brazil’s ElectroPaulo, 2.75% in Korea Exchange Bank, and 1.5% positions in such firms as China’s Bosideng International.

Sector weightings are typical for a fund of this type, with cyclicals making up over 36% of the fund, followed by communications stocks at 23% and utilities at 16.8%.

EDIV has a unique methodology in choosing portfolio constituents compared to our other emerging-market equity fund, DEM. It actively avoids distressed companies by insisting on profitable stocks with positive earnings growth over the last three years.

Moreover, it caps sector weightings to avoid over-reliance on particular sectors, a major issue in emerging markets where natural resources and financial firms typically make up the lion’s share of a small nation’s market capitalization.

What to do now: Add EDIV to your basket of dividend-oriented emerging market positions for capital appreciation potential as well as income.

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