DEM: A Legitimate Rival to EEM, VWO

The emerging markets ETF conversation, at least the multi-country fund level, is often dominated by two names: The Vanguard MSCI Emerging Markets ETF (NYSE:VWO) and the iShares MSCI Emerging Markets Index Fund (NYSE:EEM). Not only are VWO and EEM the two largest emerging markets ETFs by assets, they are two of the largest ETFs of any stripe.

As of the size these two funds was not enough, Vanguard shook up the ETF community earlier this year when it announced it would drop MSCI indexes on 22 of its funds, including VWO. Probably unintended, but even more notoriety was brought to EEM and VWO, which begin using the FTSE Emerging Markets Index next year.

Arguably, it is hard for another comparable ETF to get a foothold against stalwarts such as EEM and VWO. Fortunately for investors that are seeking additional choices, at least one ETF represents a credible alternative to EEM and VWO: The WisdomTree Emerging Markets Equity Income Fund (NYSE:DEM).

By assets, the WisdomTree Emerging Markets Equity Income Fund is not nearly the size of its more heralded rivals, but it is by no means small. And its asset growth has been nothing short of impressive this year. In late February, DEM topped the $3 billion in AUM mark. As of November 28, the fund had nearly $4.5 billion in assets: DEM's AUM total has grown by nearly 50 percent in 10 months.

Obviously, the income component to DEM is what really sets the fund apart. VWO has a trailing 12-month yield of 3.44 percent. EEM's is 1.98 percent. DEM's is nearly six percent. This chasm is odd considering that many emerging markets equities can be viewed as legitimate dividend stocks.

"Emerging market equities, by and large, are dividend payers. By our count, over 90% of the market capitalization of emerging market equities are in dividend-paying stocks," WisdomTree Research Director Jeremy Schwartz said in a note.

Not surprisingly, those dividends make a difference. Over the past three years, DEM is up 20.1 percent including dividends paid. That is quadruple the performance of EEM and better than double VWO's returns. Over that time period, DEM has also been 300 basis points less volatile than VWO and 400 basis points less volatile than EEM. The WisdomTree Emerging Markets Index (WTEMHY), which recently turned five, has been consistently less volatile than is MSCI counterpart.

"Since inception, the WTEMHY's beta relative to the MSCI EM is .80, showing 20% lower beta (or risk) compared to the 1.0 beta of the MSCI EM," Schwartz noted.

Noteworthy is the fact that DEM's index has not only trumped the MSIC Emerging Markets Index over the past five years, it has also beaten the FTSE Emerging Markets Index, the one that VWO is going to.

There are significant differences between these emerging markets indexes. For example, FTSE does not view South Korea as an emerging markets, so when VWO makes the switch, it will no longer feature South Korean equities. EEM currently has a weight of 15.4 percent to that nation while DEM devotes less than three percent of its weight to South Korea. As another example, DEM's weight to Russia more than double that of EEM's.

Both funds allocate about 12 percent to Brazil. That is one similarity, but another major difference includes DEM's 5.4 percent to Thailand, one of the best developing nations, economically speaking, over the past several years. The MSCI Index allocates barely more than two percent to that country.

"I believe those analyzing the differences in those indexes should expand the comparison and also consider new alternatives to indexing that provide different stock selection, weighting and risk-return dynamics. I believe that the last five years were a critical stress test of any index methodology, and the WTEMHY has a real-time track record that is impressive compared to traditional market cap-weighted benchmarks," said Schwartz.

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