After a multi-year malaise, emerging markets stocks and exchange-traded funds are once again generating enthusiasm among investors. That enthusiasm extends to dividend strategies, including one of the deans of emerging markets dividend ETFs, the WisdomTree Emerging Markets Eqty Incm Fd (DEM).
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With emerging markets equities ranking as one of this year's best-performing asset classes, DEM resumes a trend seen during previous eras of strength for developing world equities: out-performance of traditional emerging markets benchmarks. Year-to-date, DEM is up 20 percent compared to an average gain of 14.75 percent for the two largest emerging markets ETF.
Right or wrong, dividends are often associated with low volatility. Although its year-to-date volatility is higher than the two largest emerging markets low volatility ETFs, DEM's 20 percent gain is about 800 basis points ahead of those low volatility funds.
However, DEM is more of a value strategy, and that is working in the fund's favor this year.
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The Unique Strategies Of DEM
DEM is a strategy that looks for value and inexpensive stocks in emerging markets, and it has found those stocks in the last few years in commodity sectors including Energy and Materials and countries such as Brazil and Russia. These two commodity sectors receive about one-third of the exposure of DEM, approximately double the exposure in the MSCI Emerging Markets Index, said WisdomTree Research Director Jeremy Schwartz in a note out Wednesday.
DEM is outperforming at a trying time for emerging markets dividends. Payouts from developing world companies fell 17 percent in the first quarter, though gains in India helped offset some of the reduced payouts from Brazilian commodities producers, according to Henderson Global Investors.
India is not one of the 17 countries found in DEM's lineup, but Brazil is the ETF's fourth-largest country allocation at 10.7 percent. However, Asian dividend payers are outperforming this year and that is a boon for DEM, an ETF that allocates over 44 percent of its weight to Taiwan, China and Thailand. Asian countries combine for over half of DEM's weight.
While valuations on emerging markets stocks are not viewed as stretched, at least not yet, DEM takes added steps to ensure it limits the impact of stocks that have run up on the ETF's overall performance.
We believe this process has added value in terms of higher returns over the long run compared to traditional indexes. Recent conditions for emerging markets, with volatility and downward price moves, are key times when the WisdomTree Index family looks to buy the lower valuation segment of the market, in which prices were falling more than dividends. As some of the markets rebound strongly this year, the WisdomTree Index will become more defensive and sell the stocks that are increasing more than their underlying fundamentals, added Schwartz.
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Disclosure: Todd Shriber owns shares of DEM.
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